MetroPCS Shareholders Approve Merger With T-Mobile USA

The deal, first announced in early October 2012, had looked set for defeat until earlier this month, when Deutsche Telekom gave in to pressure to reduce the combined company's debt.

Activist shareholder P. Schoenfeld Asset Management had led a proxy battle against the original deal, while the biggest MetroPCS shareholder, Paulson & Co, had also threatened to vote against it. Both investors have said they were pleased with the improved terms.

But some shareholders said they were happy to see MetroPCS combine with a larger player, regardless of the details.

"It was significant that they sweetened the offer, but I would have voted in favor of the previous terms," said Robert Capps, a Dallas-area shareholder and telecom executive.

Of the MetroPCS shares that were voted, the company said about 93 percent were cast in favor of the main proposal related to the deal.

MetroPCS shares were down 5 cents at $11.64 in afternoon trading.

Shareholders will receive $4.06 per share in cash plus stock equivalent to 26 percent of the combined company in the reverse merger and Deutsche Telekom will own the rest.

Deutsche Telekom said the combined company will be called T-Mobile US and trade on the New York Stock Exchange under the symbol "TMUS." The deal is expected to close at the end of this month.

BETTER POSITION AGAINST RIVALS

MetroPCS, a provider to cost-conscious consumers who pay for calls in advance, and T-Mobile USA are looking to combine their spectrum assets to compete better with bigger rivals.

By tying up with MetroPCS, Deutsche Telekom hopes to provide T-Mobile USA with the spectrum to build a network capable of handling the vast data volumes that U.S. consumers and businesses use on smartphones and tablets.

Some Deutsche Telekom shareholders, however, worry that even a successful merger might not be enough for T-Mobile USA to catch up with rivals.

T-Mobile USA lost 515,000 contract customers in the fourth quarter of 2012, although it recently announced smaller losses of 199,000 contract customers in the first quarter.

The company recently overhauled its price structure to eliminate most phone subsidies and started selling Apple's iPhone for the first time. But its network quality lags Verizon Communications Inc and AT&T Inc, which have invested massively in fourth-generation mobile technology in recent years.

The United States is key to the investment case for Deutsche Telekom. It earned 26 percent of group revenue there last year and 20 percent of its operating profit.

The German group has long searched for a way to help T-Mobile USA gain critical mass to compete. In 2011, antitrust regulators blocked a $39 billion deal bid for AT&T to buy T-Mobile USA.

The merger also paves the way for what some investors and bankers think Deutsche Telekom really wants - to ultimately reduce its exposure to a highly competitive market.

For now, Deutsche Telekom has committed to holding its shares in the new combined entity for 18 months.

(Additional reporting by Sinead Carew in New York, Harro ten Wolde in Frankfurt and Leila Abboud in Paris; Editing by Gerald E. McCormick, Bernadette Baum and Andre Grenon)

DealBook: Deutsche Telekom Sweetens T-Mobile Bid for MetroPCS

Mary Altaffer/Associated PressA MetroPCS store in Manhattan.

6:07 p.m. | Updated

Deutsche Telekom sweetened a bid by its T-Mobile USA unit for MetroPCS on Wednesday, after running into fierce resistance from shareholders of the target company.

The German company offered to cut the amount of debt the combined company would bear by about $3.8 billion and reduce the interest rate by half a percentage point. It also agreed to extend a lockup period in which the company could not sell shares in the merged cellphone service provider to 18 months from 6 months.

The move will essentially improve the overall value of the merged entity’s equity. Deutsche Telekom estimates that the lower debt and interest rate will add almost $3 a share in additional value for MetroPCS shareholders.

Under the present terms of the offer, MetroPCS shareholders would be paid about $4.09 a share and receive a 26 percent stake in the combined company.

Deutsche Telekom said that its latest proposal was “best and final.” A vote on the deal, which had been set for Friday, has been rescheduled to April 24.

The move is a win for investors like the hedge funds Paulson & Company and P. Schoenfeld Asset Management, who have called for improvements to the original offer. Shares in MetroPCS risen steadily this year, as shareholders expected an improved offer to come, and people involved in the merger have said that the current offer is likely to fail if put to a vote.

Paulson & Company and P. Schoenfeld have argued that the T-Mobile bid as it stands would add too much debt and at too high a price. They have called on Deutsche Telekom to reduce the amount of leverage on the combined American telecom.

Proxy advisory firms like Institutional Shareholder Services have largely sided with the hedge funds, putting additional pressure on Deutsche Telekom to consider raising its offer.

P. Schoenfeld said in a statement that it was pleased by the new offer, though it is currently reviewing its terms.

DealBook: Paulson Opposes MetroPCS Merger With T-Mobile

7:59 p.m. | Updated

Fred R. Conrad/The New York Times John Paulson’s firm owns a 9.9 percent stake in MetroPCS.

The investment firm Paulson & Company, the largest shareholder in MetroPCS Communications, announced on Thursday that it would oppose a planned merger with T-Mobile, saying the deal would saddle the new company with too much debt.

“We believe MetroPCS is worth more as a stand-alone company,” the firm, founded by the billionaire hedge fund manager John Paulson, said in a statement. The firm has a 9.9 percent stake in MetroPCS.

Last October, the two companies announced a complex transaction, under which MetroPCS would conduct a 1-for-2 reverse stock split and pay out $1.5 billion in cash to its existing shareholders. The new company would then issue new stock worth about 74 percent to T-Mobile’s parent, Deutsche Telekom, leaving existing MetroPCS investors with a 26 percent stake.

P. Schoenfeld Asset Management, another large shareholder with a 1.6 percent stake in MetroPCS, announced earlier this month that it was leading a proxy battle opposing the merger.

The deal has not been viewed favorably by the markets, and MetroPCS’s stock is down about 32 percent since before the deal was announced.

In a letter to the MetroPCS and Deutsche Telekom boards on Thursday, Mr. Paulson outlined several issues he had with the merger, including that T-Mobile’s performance has been “poor.”

He did conclude in his letter, however, that he would support a revamped deal that reduces the new company’s debt by $6.6 billion and lower its interest rate to 4.2 percent.

“Indeed, Paulson believes this lower debt and lower interest rate will result in a significantly improved multiple for MetroPCS/T-Mobile, increasing the economic return not only to MetroPCS shareholders, but also to 74% owner Deutsche Telekom,” he wrote.

The company says it plans to continue to pursue the merger.

“The MetroPCS board of directors believes that the proposed combination with T-Mobile is in the best interests of MetroPCS and all MetroPCS stockholders and continues to recommend that MetroPCS stockholders vote in favor of the proposed combination,” a spokeswoman said in a statement.

Deutsche Telekom also reiterated that it remained committed to the merger.

“This combination will substantially benefit the shareholders and customers of both companies by creating a new company that will be the leading wireless value carrier with expanded scale, spectrum and financial resources to compete across the entire U.S. market,” the company said in a statement.

Deal Professor: Why MetroPCS Is Truly in Play

Mary Altaffer/Associated PressA MetroPCS store in Manhattan.

There are three fundamental things to know about the deal between MetroPCS and T-Mobile USA.

First, this is really just an acquisition of MetroPCS by Deutsche Telekom. After the transaction is completed, Deutsche Telekom, the German telecommunications behemoth, will own 74 percent of the combined company, which will be renamed T-Mobile. MetroPCS’s public shareholders will own the rest.

Second, though Deutsche Telekom is acquiring MetroPCS, this is also a way for Deutsche Telekom to undertake a reverse initial public offering for T-Mobile. Deutsche Telekom may be acquiring control of the combined MetroPCS and T-Mobile, but it wants to exit this business eventually. If the transaction goes through, expect Deutsche Telekom to sell those shares to the public over time.

Third, because this is really an acquisition, it puts MetroPCS, one of the few national mobile carriers, very much in play.

The deal structure is not that of a typical merger where a buyer simply acquires the target. It is instead a recapitalization. A recapitalization is a fancy term that means the rejiggering of a company’s capital structure.

The restructuring part is Deutsche Telekom’s contribution of the T-Mobile business to MetroPCS in exchange for 74 percent of the share capital of the combined business. And because this is categorized as a recapitalization, the contribution of the shares is tax free to Deutsche Telekom.

Stephan Savoia/Associated PressT-Mobile’s deal to buy MetroPCS turns up the pressure on Sprint Nextel.

The net effect is that Deutsche Telekom is acquiring control of MetroPCS.

But don’t expect Deutsche Telekom to hold on to the shares for long. As Rene Obermann, the company’s chief executive, acknowledged on an investor call, this is also a way for Deutsche Telekom to gain liquidity for its T-Mobile interest. Mr. Obermann called the transaction a “turbo I.P.O.” By doing it this way, Deutsche Telekom saves on I.P.O. costs, and also has an asset that is more easy to sell since it has greater scale.

There are also some bells and whistles on the transaction. There is a $1.5 billion dividend to MetroPCS shareholders to give them an incentive to vote for the share issuance to T-Mobile. There is also a 2-for-1 reverse stock split of MetroPCS shares. The parties didn’t disclose why, but the reverse stock split is likely to push the MetroPCS stock price back above $10 after the large dividend and keep up appearances. The stock split also has the convenience of ensuring that MetroPCS has enough authorized shares to issue to Deutsche Telekom.

MetroPCS will also restructure its debt, and Deutsche Telekom has committed to lending the new entity as much as $6 billion more in financing on top of the $15 billion the combined entity will owe Deutsche Telekom.

But it is the structure of the transaction that puts MetroPCS up for sale.

Under Delaware law, the deal is viewed as a sale because Deutsche Telekom is obtaining majority control of MetroPCS. This puts the MetroPCS board into “Revlon-land” (referring to a 1985 Delaware decision in a takeover battle over Revlon), requiring the board to obtain the highest price reasonably available for the sale of the company.

This is an open invitation for another bidder to come in and pay a higher amount, something the MetroPCS board must accept if it a clearly superior offer.

Deutsche Telekom’s main fear here is likely to be a move by Sprint. Earlier this year, MetroPCS had previously thought it had a deal with Sprint, but the Sprint board pulled out at the last minute.

MetroPCS is reported to be — surprise! — not unhappy that this new deal may spur Sprint to come to the table. And because Revlon duties apply, MetroPCS’s board is now bound to take the highest price reasonably available. If MetroPCS takes this offer, it must pay a $150 million termination fee to Deutsche Telekom.

Notably, Deutsche Telekom tried to deal with this issue by putting a “force the vote” provision in the transaction agreement. MetroPCS cannot terminate this deal even if a competing bid is made unless the company holds its shareholder vote and shareholders vote no. Before then, only Deutsche Telekom can terminate the deal even if MetroPCS’s board recommends a competing bid. And Deutsche Telekom will have five business days to match any competing bid before MetroPCS’s board can even make such recommendation change.

This will not deter a Sprint bid, but it will make it harder to complete and give Deutsche Telekom more time to respond to any competing bid.

Ultimately, the structure of the transaction was likely driven by the fact that Deutsche Telekom wanted liquidity but MetroPCS could not pay the cash necessary to acquire T-Mobile. The contribution is therefore a stepping stone to such liquidity, but Deutshe Telekom is now forced to accept this risk of a competing bid.

The next move is up to Sprint.

Either way, the real winners may be Deutsche Telekom’s lawyers and investment bankers. Their fees are likely to come out of the $3 billion in cash that AT&T paid to Deutsche Telekom in connection with AT&T’s thwarted attempt to purchase T-Mobile. And if this transaction also fails, these lawyers and bankers are also likely to be paid some part of their fees, leaving them teed up to take a run at a third transaction.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

DealBook: T-Mobile Seals Deal With MetroPCS

The parent company of T-Mobile USA agreed to buy MetroPCS on Wednesday, as the cellphone providers looked to compete with bigger rivals.

The merger is aimed at making T-Mobile a more robust competitor to Sprint Nextel, particularly in low-cost cellphone service. The deal will also help T-Mobile gain more customers and resources to build out a next-generation data network.

Under the terms of the complex transaction, MetroPCS will conduct a 1-for-2 reverse stock split and pay out $1.5 billion in cash to its existing shareholders, or about $4.09 a share. It will then issue new stock worth about 74 percent to T-Mobile’s parent, Deutsche Telekom, leaving existing MetroPCS investors with a 26 percent stake.

“The T-Mobile and MetroPCS brands are a great strategic fit – both operationally and culturally,” René Obermann, the chief executive of Deutsche Telekom, said in a statement. “The new company will be the value leader in wireless with the scale, spectrum and financial and other resources to expand its geographic coverage, broaden choice among all types of customers and continue to innovate.”

The cellphone carrier is bulking up in the face of increased competition. The combined company, which will be named T-Mobile, will have nearly $25 billion in revenue and $6.3 billion in profit. T-Mobile expects to wring out $6 billion to $7 billion in cost savings.

CLOSING THE GAP If the parent company of T-Mobile USA buys MetroPCS, the combined unit would have the fourth most cellular subscribers.

More important, T-Mobile will add to its customer base. With 42.5 million users, the combined company will close the gap significantly with Sprint, the No. 3 player with 56.4 million customers.

T-Mobile and MetroPCS will continue to operate as separate brands.

Throughout the morning, T-Mobile executives sought to allay one of the biggest concerns about the merger, the incompatibility of the company’s network with MetroPCS’ own. John Legere, who will become the chief executive of the combined network operator, argued that the company will slowly move MetroPCS’ customers to its own GSM standard — with the goal of moving the unified entity to the Long Term Evolution technology down the road.

The aim was to avoid comparisons to Sprint’s merger with Nextel, which failed at the same task and left that merged company in a far weaker position.

“This is not a replay of a debacle that we’ve seen in the past,” he said on a conference call with analysts. “We will not smash together two networks with differing technologies.”

Morgan Stanley and Lazard advised Deutsche Telekom. Legal advice was provided by Wachtell, Lipton, Rosen & Katz; Cleary Gottlieb Steen & Hamilton; K&L Gates; and Wiley Rein.

MetroPCS was advised by JPMorgan Chase, Credit Suisse and the law firms Gibson, Dunn & Crutcher; Paul Hastings; and Telecommunications Law Professionals. A special committee of its board was advised by Evercore Partners and the law firms Akin Gump Strauss Hauer & Feld and Fulbright & Jaworski.

DealBook: T-Mobile Looks to Buy MetroPCS

Oliver Berg/DPA, via Agence France-Presse — Getty ImagesRene Obermann, chief of Deutsche Telekom.

9:06 p.m. | Updated The parent company of T-Mobile USA, the struggling cellphone service provider, is in talks to buy MetroPCS as it fights to compete against two bigger rivals.

A deal would be the latest chapter in an industry that has rapidly consolidated to a handful of major players. It would come after last year’s aborted attempt by AT&T to buy T-Mobile for $39 billion, an ambitious move thwarted by government antitrust regulators.

Both T-Mobile’s parent, Deutsche Telekom, and MetroPCS confirmed on Tuesday that they were in talks. A deal could be announced as soon as Wednesday, according to people briefed on the matter, who cautioned that final moves could derail an agreement.

Any possible transaction would most likely involve a stock swap, leaving Deutsche Telekom with a significant stake in a newly public T-Mobile.

Shares in MetroPCS climbed nearly 18 percent on Tuesday, to $13.57. That valued the company at $4.93 billion.

In recent years, AT&T and Verizon Wireless have seized increasingly bigger portions of the American cellphone market; together, they claim to have more subscribers than their next six competitors combined. Though a merger would not put the subscriber base of T-Mobile and MetroPCS anywhere near the two largest carriers, it would make the combined company a stronger competitor.

T-Mobile and its larger rival, Sprint Nextel, have both sought customers seeking lower-cost plans. Both have also raced to build their next-generation data networks to better service newer smartphones, like the Samsung Galaxy S III.

But T-Mobile has fallen well behind Sprint in its fight for users. As of midyear, the company claimed about 33.2 million customers, compared with Sprint’s 56 million. It still does not offer the Apple iPhone, which has deprived it of subscribers with higher-price data plans.

T-Mobile also lost 205,000 subscribers in its second quarter of this year, quadruple what it reported a year ago.

Buying MetroPCS, an 18-year-old wireless service provider based in Richardson, Tex., might solve those problems. The company had 9.3 million customers as of June 30, many located in major cities. And it has already begun introducing Long Term Evolution, or LTE, the high-speed network on which smartphones like the iPhone 5 run.

Merging T-Mobile and MetroPCS could prove tricky. While the two could eventually combine their LTE networks, the majority of their phones run on incompatible network standards, reducing any cost savings from a tie-up in the short run. And MetroPCS offers only prepaid plans, a business that T-Mobile has been eager to exploit — but which also carries lower margins.

Yet such headaches may prove worthwhile, because a deal would deprive Sprint of a suitable takeover target to fix its own problems. Sprint had neared its own deal for MetroPCS this year, only to walk away after its board vetoed those plans at the 11th hour. Sprint’s stock fell 5.4 percent on Tuesday as investors worried about what a T-Mobile-MetroPCS combination would mean for its ability to vie for consumers.

Sprint’s chief executive, Daniel Hesse, said at an industry conference last month that he expected his company to participate in what he saw as a continuing wave of consolidation.

“This leaves Sprint awkwardly independent and on the outside looking in,” Craig Moffett, an analyst at Sanford C. Bernstein & Company, said in a phone interview. He added that Sprint may feel compelled to make a higher bid because “the alternative is so unattractive.”

Shares in Leap Wireless International, another prepaid wireless service provider, closed more than 8 percent higher on Tuesday, as investors hoped the company would prove to be another merger target. But analysts said that Leap, with its focus on lesser markets and with major operational problems, may remain independent for a while longer.

“We don’t view Leap to be as attractive as MetroPCS; Leap has a smaller subscriber base, lower margins and burns cash,” Mike McCormack, an analyst at Nomura, wrote in a research note on Tuesday.

Should it reach a deal, Deutsche Telekom could sell down its stake in T-Mobile over time. That would eventually unwind its expensive experiment in the American marketplace, one that began with the German telecom’s purchase of VoiceStream Wireless at the peak of the dot-com era in 2001. Since then, however, troubles at T-Mobile have cost Deutsche Telekom dearly, including an $18 billion write-down a year later.

Executives at the German telecommunications company have openly spoken about possible deals for the American unit, including by staging an initial public offering or combining it with another industry player.

One uncertainty about any deal would be the reaction from antitrust regulators. But a transaction may draw less fiery opposition than the failed combination of AT&T and T-Mobile, given the smaller size of MetroPCS.

This post has been revised to reflect the following correction:

Correction: October 2, 2012

An earlier version of this article misstated the number of T-Mobile customers. There are 33.2 million, not 33,168.