MetroPCS Communications, Inc.
Deutsche Telekom AG
parent company of T-Mobile USA have finally settled for a merger
deal. The two companies have signed a definitive agreement on a
proposed merger of T-Mobile USA and MetroPCS.
The proposed agreement has been approved by the Board of
Directors of both MetroPCS and Deutsche Telekom, but is still
subject to MetroPCS' shareholders approval as well as regulatory
approvals along with other conditions. The deal is expected to
close in the first half of 2013.
According to the deal terms, MetroPCS would be entitled to a 24%
stake in the combined company and Deutsche Telekom would own the
remaining76% of stakes. The transaction process of the deal could
be viewed as recapitalization of MetroPCS. MetroPCS will declare a
1-for-2 reverse stock split and pay $1.5 billion in cash to
shareholders. This comes to approximately $4.09 per share prior to
the reverse stock split. In addition, MetroPCS will acquire total
T-Mobile shares in exchange of 74% of stakes of its own transferred
to Deutsche Telekom.
Under the deal terms, Deutsche Telekom will convert its existing
inter-company debt into new $15 billion senior unsecured notes of
the combined company and provide an unsecured revolving credit
facility of $500 million to the combined company. Further, Deutsche
Telekom will also facilitate the merged company's operations with
$5.5 billion backstop commitment for certain MetroPCS third-party
financial dealings. If the deal materializes, MetrPCS will continue
to trade in the U.S. market with the name changed to
Based on market estimates, the combined company is expected to
have 2012 pro forma revenues of approximately $24.8 billion and
cost synergies of $6-$7 billion. Further, in FY12 the combined
operations are estimated to garner $6.3 billion in adjusted EBITDA
and $2.1 billion in free cash flows alongside incurring estimated
capital expenditures of $4.2 billion. Beyond this, the deal is
expected to result in accelerated financial growth with estimated
five-year CAGR for revenues, EBITDA and free cash flow in the range
of 3%-5%, 7%-10% and 15%-20%, respectively.
Apart from financial benefits, the merger between MetroPCS and
T-Mobile would boost their operation capabilities in the U.S.
Currently, MetroPCS and T-Mobile have over 9 million and 33 million
subscribers, which combined together would form a subscriber base
of more than 40 million for the combined company. Further, the deal
would add to spectrum capacity and result in higher penetration of
LTE networks that support speed of upto 20x20 MHz of 4G LTE in
several regions. T-Mobile would be able to benefit from MetroPCS'
superior market position in no contract wireless services, while
MetroPCS will gain from T-Mobile's advance B2B services and Mobile
virtual network operator (MVNO) platform.
Given all the transactional details and expected synergies, the
deal looks lucrative for both MetroPCS and T-Mobile. However, there
still remains a big unanswered question, which is regarding their
effort to scale up the competitive ladder. The core reason behind
this most awaited liaison is to safeguard their market share
against rivals - like
Sprint Nextel Corp.
). How far the deal will be able to uplift the combined company's
struggling position and withstand the ever rising competition is
something to watch out for.
We currently have our long-term Outperfrom recommendation on
MetroPCS. For the short-term (1-3 months) the company retains a
Zacks #3 Rank (a short-term Hold rating).
DEUTSCHE TELEKM (DTEGY): Free Stock Analysis
METROPCS COMMUN (PCS): Free Stock Analysis
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