Mergers and takeovers in the U.S. telecom market tend to
hit the headlines from time to time. The latest buzz is about
T-Mobile USA's merger plans with low cost carrier
MetroPCS Communications, Inc
According to Bloomberg reports, German giant,
Deutsche Telekom AG
) is in talks with MetroPCS for a possible merger with its U.S.
wireless unit, T-Mobile USA.
Per the reports, the deal is expected to comprise a stock swap
between the two parties. This would enable Deutsche Telekom to gain
majority controlling power in the combined entity, which
would be publicly traded.
The market reacted positively to the report, taking the MetroPCS
stock up 31% from its opening, to the day's high of $8.45 on May 9.
Leap Wireless International Inc.
) also benefited from market talks with a 14% rise in its stock
Much Ado about Telecom M&As
The recent years have been a boom 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, the market for wireless services stands at around $61
billion, which is expected to touch approximately $155 billion by
2016 with a compounded annual growth rate of approximately
20%. A major share of this growth story is dedicated 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 leaped 43% to 111.5 million in 2011, from 78.2 million in
2010. The technological innovations in the wireless device segment
have transformed the simple cell phone into a smartphone that feeds
on data and does more than talk and text.
Further, with hi-tech marvels like
) iPhone and
) Android-based smartphones and tablets, mobile technology has come
of age. These wireless devices have become a quick access solution
for all Internet activities and have virtually replaced the
conventional PC and laptops.
As a result, wireless carriers are increasingly deploying 3G and
4G network platforms that would support the capacity requirements
for wireless data services. However, the deployment of these
network platforms requires additional spectrum, which is currently
the biggest concern for the wireless industry.
Given the lack of spectrum, carriers are facing difficulties in
managing data traffic, resulting in reduced data speed on most
network areas. Carriers like
), were also reported to have gone limited on their unlimited data
plans following high congestion on their
Wireless carriers are in the fray to obtain spectrum licensing
and lure customers by deploying 3G and 4G services acrosst heir
markets. As spectrum remains limited, the fight is intensifying.
Smaller carriers 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 to withstand
competition. Stiff competition has forced larger carriers to
strengthen their market position.
Apart from spectrum worries, these carriers are looking toward
,strengthening their market through acquisitions. These
acquisitions serve to increase their subscriber base and most
importantly, enhance infrastructure. Further, acquiring
smaller companies could also aid in reducing competition in the
race for spectrum. To conclude, spectrum requirement will be the
major consideration that will drive the M&A bandwagon.
Recent Acquisition Attempts
In 2011, the news about the $39 billion merger between AT&T
Inc. 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 to dethrone Verizon.
However, the much-awaited deal ended in a disaster. Following a
nine-month fight to win approvals, the deal was dropped by
AT&T. The Federal Communications Commission (FCC) cited
concerns of unfair competition, layoffs, higher prices, lower
innovation and investment in the industry.
The deal was also opposed by the third-largest U.S. wireless
Sprint Nextel Corp.
), as the combined company would have been almost three times that
of Sprint and consequently in a position to hurt its
Following the AT&T/ T-Mobile merger fall out, speculation
over a Sprint and Metro PCS merger were also making the rounds
earlier this year. However, this deal too did not materialize as
Sprint's board of director's rejected the proposition.
Outcomes from T-Mobile/ MetroPCS Expected Deal
Given the recent history of failed M&A deals, we remain
somewhat skeptical about any new news. Deutsche Telekom rhas
eportedly said that merging with smaller company was not a
choice, but a move in which it had no option.
However, after the failed attempt of Deutsche Telekom to
collaborate with U.S. telecom czar AT&T, Deutsche Telekom has
not lost hopes about going public in the U.S. market. This
contemplated deal was another effort by the company to strengthen
its foothold in the U.S. and save falling subscriber numbers.
It is also rumored that Deutsche Telekom is viewing other viable
options such as launching IPO or sale of T-Mobile USA. According to
market reports, the company is also in talks with other companies
regarding its plans on T-Mobile USA.
However, given the nature of the recent merger talks, we think
that this deal does not call for any regulatory threat. T-Mobile
USA and MetroPCS hold market penetration of approximately 9% and
2%, respectively (according to Bloomberg). As a result, we do not
foresee similar concerns surfacing as in the case of AT&T
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, only a wait and
watch policy can confirm the extent of benefits that Deutsche
Telekom is able to draw from the "in talks" deal.
We currently have a Zacks #4 Rank (Sell) On MetroPCS and a Zacks
#5 Rank (Strong Sell) on Deutsche Telekom. For the long-term, we
have a Neutral recommendation on MetroPCS.
APPLE INC (AAPL): Free Stock Analysis Report
DEUTSCHE TELEKM (DTEGY): Free Stock Analysis
GOOGLE INC-CL A (GOOG): Free Stock Analysis
LEAP WIRELESS (LEAP): 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
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