Deutsche Telekom confirmed today that it is merging its T-Mobile USA unit with MetroPCS (PCS). The deal will increase T-Mobile USA’s subscriber base by about 28%, giving it a total customer base of about 42.5 million subscribers and bolstering its position as the nation’s No. 4 carrier, behind Verizon Wireless, AT&T Mobility and Sprint Nextel.
The deal is a complicated one relying on the always satisfying “reverse merger” nomenclature. Broken down, the deal calls for MetroPCS to be the acquiror, but Deutsche Telekom ending up controlling 74% of the merged company. The German company currently owns 100% of T-Mobile USA. MetroPCS shareholders will get $1.5 billion in cash, and 26% of the new company. With MetroPCS stock trading at about $12.50 a share this morning, the market is valuing the deal at roughly $4.6 billion. At the end of June, MetroPCS had $4.7 billion in long-term debt.
The deal also includes a “small” break up fee that would see T-Mobile USA paid $250 million and MetroPCS $150 million should the deal fall apart. The deal is still awaiting final approval from MetroPCS shareholders, which is expected early next year, with plans for the deal to close in mid-2013.
There is also the issue of regulator approval, which many do not expect to be much of a problem considering the size of the companies involved and that both brands are currently set to continue. However, clarity on regulatory approval has been a hot topic issue for the industry following the dismissal of AT&T’s $39 billion acquisition attempt of T-Mobile USA last year and the recent approval of Verizon Wireless acquisition of 1.7/2.1 GHz spectrum assets from cable operators earlier this year.
Analysts noted the transaction allows DT to further monetize its U.S. operations as well as provides a clearer step to a possible spin off down the road.
Recently named T-Mobile USA CEO John Legere will be CEO of the new company with current T-Mobile USA COO Jim Alling set to run the T-Mobile part of the business. Current MetroPCS COO Thomas Keys will run the MetroPCS side, which indicates that the company will continue with the two brands.
The deal is yet another feather in the cap for Legere, who in just a few short weeks has managed to sell off the company’s tower assets for $2.4 billion and then the company.
Deutsche Telekom CEO Rene Obermann said this morning that the merger should result in $6 to $7 billion in cost savings. He did not say whether job cuts would be part of those cost savings. He said MetroPCS shareholders will vote on the merger late this year or early next year, and the deal should close within the first half of 2013. The U.S. Justice Department is not expected to block the deal since it does not appear to create a carrier larger enough to thwart competition or set prices.
Analysts have noted that the deal should strengthen the operators position in the rapidly expanding, but highly competitive, no-contract space. That space is currently flooded by offerings from Sprint Nextel through its Virgin Mobile, Boost Mobile and Assurance Wireless sub-brands, Leap Wireless’ Cricket service and a plethora of offerings from Tracfone in the form of Net10 and Straight Talk. MetroPCS and T-Mobile USA have also been focusing on this part of the market in an effort to undercut the prices of larger carriers with faster networks.
Prepaid customers tend to upgrade their handsets more often than do contract customers, a trend that T-Mobile USA claims will play to its advantage as it migrates customers to a common LTE network. Right now MetroPCS operates a CDMA and LTE network using a mix of 1.9 GHz and 1.7/2.1 GHz spectrum, while T-Mobile USA offers GSM/GPRS/EDGE services running across its 1.9 GHz spectrum and HSPA-based services running across its 1.7/2.1 GHz spectrum holdings. T-Mobile USA is in the process of implementing a network overhaul that will see it migrate HSPA-based services into its 1.9 GHz band that will then free up its 1.7/2.1 GHz spectrum for the rollout of LTE.
T-Mobile USA’s current spectrum holdings. (Source: Mosaik Solutions)
MetroPCS for its part is aggressively migrating its CDMA-based customers to its LTE service, which is more spectrally efficient, through the use of low-priced, LTE-equipped smartphones. That move is needed as MetroPCS is looking to free up more spectrum assets to bolster its lackluster LTE offering that is currently relying on just a handful of megahertz for service.
MetroPCS’ current spectrum holdings. (Source: Mosaik Solutions)
MetroPCS customers will be impacted significantly by the proposed deal as they will have to eventually migrate to new devices in order to take advantage of the combined network offering, a process complicated by its no-contract service offering and accompanying low device subsidy model. With customers looking to keep their no-contract offering likely also having to fork over most of the price of a new device, the prospect of those customers looking elsewhere could be great. That likelihood is also compounded by the fact that neither MetroPCS nor T-Mobile USA currently offer Apple’s iconic iPhone device, though that could change once the carriers roll out LTE services in the 1.7/2.1 GHz band.
Net-net, the combined operations will initially have customers using a CDMA network in the 1.9 GHz band, GSM/GPRS/EDGE services in the 1.9 GHz band, HSPA-based customers using service in the 1.7/2.l GHz band from T-Mobile USA and LTE-based services in those same bands from MetroPCS. T-Mobile USA was also quick to point out that the deal will provide it with up to 40 megahertz of 1.7/2.1 GHz spectrum in some markets in which it plans to roll out LTE services, a significant increase from the 20 megahertz the carrier was going to have to rely on pre-merger.
T-Mobile USA/MetroPCS combined spectrum holdings. (Source: Mosaik Solutions)
T-Mobile USA/MetroPCS overlapping markets. (Source: Mosaik Solutions)
T-Mobile USA did not seemed phased by the network and spectrum diversity, hitting out at those claiming that the carrier could be in for some disruptions akin to what Sprint witnessed following its acquisition of Nextel Communications. That deal witnessed Sprint attempt to run its CDMA operations in the 1.9 GHz band as well as Nextel’s iDEN services in the 800 MHz band.
Speaking of Sprint Nextel, most analysts saw the nation’s No. 3 carrier as the biggest loser in the deal as a combined T-Mobile USA/MetroPCS poses a more formidable foe in the no-contract space as well as takes away a potential acquisition Sprint Nextel was reportedly close to picking off earlier this year.
Others did note that all is not lost for Sprint Nextel, as any bobble in the integration process at T-Mobile USA/MetroPCS could leave Sprint Nextel in a prime position to scooping up collateral fallout, especially in the prepaid space. Sprint Nextel is well aware of this phenomenon from its Nextel integration difficulties.
Other carriers cited as being impacted by the proposed deal include Leap Wireless and U.S. Cellular. Leap, which has for years been in an on-again, off-again romance with natural rival MetroPCS, seems to have lost that dance partner for the moment, though there could now be increased pressure on Sprint Nextel to go after Leap in order to secure spectrum assets and bolster its no-contract offering.
A similar argument was offered for U.S. Cellular, which could be a likely target for Sprint Nextel as well. U.S. Cellular lacks the no-contract focus of the others, but has a rather loyal postpaid following in its markets as well as spectrum assets and a recently launched LTE service.
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