Merger talks between T-Mobile USA - a subsidiary of
Deutsche Telekom AG ( DTEGY
) - and low cost carrier MetroPCS
Communications, Inc . ( PCS )
are hitting the headlines again. However, this time it comes
straight from the horse's mouth. Both MetroPCS and Deutsche Telekom
recently confirmed their merger talks, though no deal has been
The market showed a positive initial reaction to the report,
taking the MetroPCS stock up 17% to $13.57 on October 2
nd closing. The share price has since come down,
but remains above trading levels before the announcement.
The news of the merger between the companies first surfaced in
May this year when Bloomberg reported that Deutsche Telekom was in
discussions with MetroPCS for a possible merger with its U.S.
wireless unit - T-Mobile USA.
Around the same time, it was also reported that the deal would
entail a stock swap between the two parties. This would enable
Deutsche Telekom to gain a majority of the controlling power in the
combined entity, which would be publicly traded.
Much Ado About Telecom M&As
The recent years have been a booming period for the telecom
market with rapid expansion in the wireless space. According to
market sources, the wireless industry contributed over $195 billion
to the U.S. GDP in 2011 and this is expected to reach approximately
$1.5 trillion over the next ten years.
Globally, market capitalization of wireless services stand at
around $61 billion and is expected to touch approximately $155
billion by 2016 with a growth rate of about 20%. A major
share of this growth story is attributed to the insatiable demand
for wireless data services.
According to CTIA reports, the U.S. wireless data traffic grew
approximately 123% to 866.7 billion MB in 2011 from 388 billion MB
in 2010. CTIA reports also suggest that the number of smartphone
users has also leaped 43% to 111.5 million in 2011 from 78.2
million in 2010. This has led to an inevitable growth in wireless
data traffic. However, managing this data traffic requires
additional spectrum, which is currently the biggest concern for the
Wireless carriers are in the fray to obtain spectrum licensing
and lure customers with deploying 3G and 4G services across their
markets. As spectrum remains limited, the fight over it is
intensifying. Smaller carriers like MetroPCS are failing to cope
with industrial bigwigs given huge capital requirements. As a
result, the best way to deal with spectrum constraints for these
low cost carriers is to form a suitable liaison that will enable
them to withstand the competitive market.
Recent Acquisition Attempts
In 2011, the news of $39 billion merger of AT&T
Inc . ( T ) and T-Mobile USA took the wireless market by
storm. It would have been the biggest deal ever, consolidating
AT&T's position as the largest U.S. wireless carrier dethroning
Verizon Communications Inc. ( VZ ).
However, the much awaited deal ended in a disaster. Following a
nine-month fight to win approvals, the deal was dropped by
The Federal Communications Commission (FCC) cited concerns of
unfair competition, layoffs, higher prices, lower innovation and
investments in the industry. Further, the deal was opposed by
the third-largest U.S. wireless carrier Sprint Nextel
Corp. ( S ) as the combined company would have been
almost three times that of Sprint, and consequently, would hurt its
Following the AT&T/ T-Mobile merger fall out, speculations
over Sprint and Metro PCS merger were also making rounds early this
year. However, this deal too did not materialize as Sprint's Board
of Directors rejected the proposition.
Outcomes from T-Mobile
Given the recent history of failed M&A deals, we remain
somewhat skeptical over the news. Deutsche Telekom had previously
stated that merging with the smaller company was not a choice, but
the only option.
However, after the failed attempt of Deutsche Telekom to
collaborate with U.S. telecom czar AT&T, it has not lost hope
on tapping potential future opportunity in the U.S. market. This
contemplated deal is another effort by the company to strengthen
its position in the U.S and save falling subscriber numbers.
Previously, it was also rumored that Deutsche Telekom is viewing
other viable options such as launching IPO or sale of T-Mobile USA.
In fact, the company's talks with other companies' carries in the
U.S. also made the market buzz.
However, given the nature of the recent merger talks, we think
that it does not call for any regulatory threat. As per reports,
T-Mobile and Metro PCs hold market penetration of approximately 9%
and 2%, respectively. As a result, we do not foresee similar
concerns surfacing as in the case of AT&T Inc and T-Mobile
Upon execution, we expect the deal to be accretive to MetrPCS
given its alliance with the fourth-largest wireless operator
following Verizon, AT&T and Sprint. However, how much benefit
T-Mobile would draw from the "in talks" deal is something to wait
and watch for.
We are currently maintaining our long-term Outperform rating on
MetroPCS with a Zacks #1 Rank (Strong Buy).
DEUTSCHE TELEKM (DTEGY): Free Stock Analysis
METROPCS COMMUN (PCS): Free Stock Analysis
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
To read this article on Zacks.com click here.