, founder of Paulson & Co., increased his stake in MetroPCS
Communications Inc. (
) by 14.15% at the average price of $9.80 on Feb. 28, 2013,
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. Paulson, the largest shareholder of MetroPCS Communications
with a 9.9% stake, argued that its share price is depressed
because investors are wary of the proposed merger between the
company and highly levered T-Mobile, which he is fighting.
In a letter to MetroPCS's board of directors dated Feb. 28,
Paulson wrote that a merger between MetroPCS and the privately
held T-Mobile would have too much debt to compete within a
well-capitalized and rapidly consolidating U.S. wireless
industry. The resulting risk would be greater for MetroPCS
shareholders, while Deutsche Telekom, 74% shareholder and holder
of $15 billion of the company's $23.2 billion in debt, would
receive the bulk of the value.
With a net debt to 2013 EBITDA multiple of 3.6x, combined
enterprise value to LTM EBITDA multiple of 4.7x and 7% interest
rate, MetroPCS/T-Mobile equity would carry substantial risk, he
Further, he stated that MetroPCS has performed better than
T-Mobile, reporting record EBITDA of over $1.5 billion in 2012, a
14% year-over-year increase; EBITDA margins of 29.6%, increased
216 basis points over 2011; a 40 basis-point decrease in annual
church to 3.4% in 2012; more than 2.2 million 4G LTE subscribers,
increased 117% from the previous quarter; and various operational
T-Mobile meanwhile reported decreases in sales, EBITDA, EBITDA
margin and ARPU in 2012 compared to 2011.
Paulson suggested in the letter to solve the disparity in the
deal by reducing the amount of debt Deutsche Telekom (
) would contribute and the interest rate. Alternatively, he would
support the deal under a modified debt structure, increased
exchange ratio for Metro PCS shareholders, added cash, or a
combination of those.
"We believe that the stock could appreciate significantly if the
merger is voted down," he said.
He also added, "We believe MetroPCS will be worth more as a
stand-alone company than it would be if it merges with T-Mobile.
Since the merger with T-Mobile was announced MetroPCS stock has
declined 27.1% while the wireless industry weighted average has
MetroPCS first confirmed that it was in talks with Deutsche
Telekom concerning a merger with T-Mobile USA on Oct. 2. The
following day, it formally announced the proposal in which
MetroPCS shareholders would receive $1.5 billion in cash and 26%
ownership of the combined company, and Deutsche Telekom would
receive 74% of the company.
The combined company would deliver "expected five-year compounded
annual growth rates in the range of 3% to 5% for revenues, 7% to
10% for EBITDA and 15% to 20% for free cash flow" while
"targeting an EBITDA margin in the range of 34% to 36% at the end
of the five-year period and achievable projected cost synergy
realization with an annual run-rate of $1.2-1.5 billion," the
official statement said.
It would also have "approximately 42.5 million subscribers, $24.8
billion of revenue, $6.3 billion of adjusted EBITDA, $4.2 billion
of capital expenditures and $2.1 billion of free cash flow
(defined as EBITDA less capital expenditures) in 2012," based on
analyst consensus estimates.
Other Gurus clambered to MetroPCS in the fourth quarter.
and Jean-Marie Eveillard all established new positions, as Joel
Greenblatt almost doubled the size of the stake he began in the
first quarter of 2012.
Paulson also stated in his letter that he "believes in the merits
of U.S. wireless consolidation," which is reflected in his
127,693,000 million-share purchase of Sprint (
) and 7.8 million-share holding and fourth quarter increase of
Leap Wireless International (
). Communication Services accounts for 13.3% of his portfolio,
and is his third greatest sector weighting.
See John Paulson's portfolio here. Also check out the Undervalued
Stocks, Top Growth Companies, and High Yield stocks of John
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