Deal Professor: Why MetroPCS Is Truly in Play

Mary Altaffer/Associated PressA MetroPCS store in Manhattan.

There are three fundamental things to know about the deal between MetroPCS and T-Mobile USA.

First, this is really just an acquisition of MetroPCS by Deutsche Telekom. After the transaction is completed, Deutsche Telekom, the German telecommunications behemoth, will own 74 percent of the combined company, which will be renamed T-Mobile. MetroPCS’s public shareholders will own the rest.

Second, though Deutsche Telekom is acquiring MetroPCS, this is also a way for Deutsche Telekom to undertake a reverse initial public offering for T-Mobile. Deutsche Telekom may be acquiring control of the combined MetroPCS and T-Mobile, but it wants to exit this business eventually. If the transaction goes through, expect Deutsche Telekom to sell those shares to the public over time.

Third, because this is really an acquisition, it puts MetroPCS, one of the few national mobile carriers, very much in play.

The deal structure is not that of a typical merger where a buyer simply acquires the target. It is instead a recapitalization. A recapitalization is a fancy term that means the rejiggering of a company’s capital structure.

The restructuring part is Deutsche Telekom’s contribution of the T-Mobile business to MetroPCS in exchange for 74 percent of the share capital of the combined business. And because this is categorized as a recapitalization, the contribution of the shares is tax free to Deutsche Telekom.

Stephan Savoia/Associated PressT-Mobile’s deal to buy MetroPCS turns up the pressure on Sprint Nextel.

The net effect is that Deutsche Telekom is acquiring control of MetroPCS.

But don’t expect Deutsche Telekom to hold on to the shares for long. As Rene Obermann, the company’s chief executive, acknowledged on an investor call, this is also a way for Deutsche Telekom to gain liquidity for its T-Mobile interest. Mr. Obermann called the transaction a “turbo I.P.O.” By doing it this way, Deutsche Telekom saves on I.P.O. costs, and also has an asset that is more easy to sell since it has greater scale.

There are also some bells and whistles on the transaction. There is a $1.5 billion dividend to MetroPCS shareholders to give them an incentive to vote for the share issuance to T-Mobile. There is also a 2-for-1 reverse stock split of MetroPCS shares. The parties didn’t disclose why, but the reverse stock split is likely to push the MetroPCS stock price back above $10 after the large dividend and keep up appearances. The stock split also has the convenience of ensuring that MetroPCS has enough authorized shares to issue to Deutsche Telekom.

MetroPCS will also restructure its debt, and Deutsche Telekom has committed to lending the new entity as much as $6 billion more in financing on top of the $15 billion the combined entity will owe Deutsche Telekom.

But it is the structure of the transaction that puts MetroPCS up for sale.

Under Delaware law, the deal is viewed as a sale because Deutsche Telekom is obtaining majority control of MetroPCS. This puts the MetroPCS board into “Revlon-land” (referring to a 1985 Delaware decision in a takeover battle over Revlon), requiring the board to obtain the highest price reasonably available for the sale of the company.

This is an open invitation for another bidder to come in and pay a higher amount, something the MetroPCS board must accept if it a clearly superior offer.

Deutsche Telekom’s main fear here is likely to be a move by Sprint. Earlier this year, MetroPCS had previously thought it had a deal with Sprint, but the Sprint board pulled out at the last minute.

MetroPCS is reported to be — surprise! — not unhappy that this new deal may spur Sprint to come to the table. And because Revlon duties apply, MetroPCS’s board is now bound to take the highest price reasonably available. If MetroPCS takes this offer, it must pay a $150 million termination fee to Deutsche Telekom.

Notably, Deutsche Telekom tried to deal with this issue by putting a “force the vote” provision in the transaction agreement. MetroPCS cannot terminate this deal even if a competing bid is made unless the company holds its shareholder vote and shareholders vote no. Before then, only Deutsche Telekom can terminate the deal even if MetroPCS’s board recommends a competing bid. And Deutsche Telekom will have five business days to match any competing bid before MetroPCS’s board can even make such recommendation change.

This will not deter a Sprint bid, but it will make it harder to complete and give Deutsche Telekom more time to respond to any competing bid.

Ultimately, the structure of the transaction was likely driven by the fact that Deutsche Telekom wanted liquidity but MetroPCS could not pay the cash necessary to acquire T-Mobile. The contribution is therefore a stepping stone to such liquidity, but Deutshe Telekom is now forced to accept this risk of a competing bid.

The next move is up to Sprint.

Either way, the real winners may be Deutsche Telekom’s lawyers and investment bankers. Their fees are likely to come out of the $3 billion in cash that AT&T paid to Deutsche Telekom in connection with AT&T’s thwarted attempt to purchase T-Mobile. And if this transaction also fails, these lawyers and bankers are also likely to be paid some part of their fees, leaving them teed up to take a run at a third transaction.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

DealBook: T-Mobile Deal for MetroPCS Adds Pressure on Sprint

By clinching a deal to buy MetroPCS, T-Mobile USA is aiming not only to survive but also to turn up the pressure on its larger rival, Sprint Nextel.

The merger, formally announced on Wednesday, signals a renewed phase of jockeying among cellphone service providers as they race to draw in more smartphone users and upgrade to the latest high-speed data networks. And by taking one of the most attractive takeover targets, MetroPCS, off the table, T-Mobile may have strengthened its hand at the expense of Sprint.

The cellphone service industry is dominated by the virtual duopoly of Verizon Wireless and AT&T, which together claim 199 million customers, more than their next six competitors combined. That has left Sprint and T-Mobile to scramble, trying to undercut their big rivals on price even as they seek additional wireless spectrum that would support high-speed data networks.

The industry has long looked to consolidation to grow; last year, AT&T unsuccessfully sought to buy T-Mobile for $39 billion, hoping to gain size and spectrum. Growth via merger also underpinned Sprint’s aborted attempt to buy MetroPCS this year, a transaction scrapped at the 11th hour by Sprint’s reluctant board.

MetroPCS represents a potentially big lost opportunity for Sprint. The two companies use the same network technology (CDMA), which would have made for a relatively smooth integration of customers and devices. T-Mobile runs on GSM, so the company will have to convert MetroPCS’s 9.3 million customers to its technology over the next three years.

CLOSING THE GAP If the parent company of T-Mobile USA buys MetroPCS, the combined unit would have the fourth most cellular subscribers.

The newly enlarged T-Mobile will have about 42.5 million customers, compared with Sprint’s 56 million. But the merger could potentially give T-Mobile additional clout to demand popular devices like the iPhone, which it does not now carry. Adding MetroPCS will also help T-Mobile build out more quickly its Long Term Evolution network, the speedy data standard that powers the latest batch of smartphones.

T-Mobile executives argue that the unified operator can offer unlimited data and cheaper prepaid service plans to more customers.

“When you look at this as an industry, we are the alternative choice for consumers,” John J. Legere, the company’s chief executive, said in a telephone interview. “This can only be good for the industry to think about the competition and consumer.”

T-Mobile’s parent, Deutsche Telekom, and MetroPCS held on-and-off discussions about a merger for years, according to people with direct knowledge of the matter who spoke anonymously because they were not authorized to speak publicly about private discussions. But after Sprint’s board vetoed a takeover of the smaller service provider, T-Mobile and MetroPCS met early this summer to begin formal discussions about a deal.

Weeks of negotiations ensued, leading to a structure in which Deutsche Telekom would own 74 percent of the combined entity through a complicated stock swap. Existing MetroPCS shareholders will also receive $1.5 billion through a special dividend, worth about $4.09 a share.

And while antitrust officials fiercely opposed AT&T’s takeover of T-Mobile, people involved in the MetroPCS transaction argued that Wednesday’s deal was more likely to pass regulatory muster. Instead of fortifying one of the country’s biggest service providers, it will bolster one of its weaker ones.

A spokesman for Sprint declined to comment.

With T-Mobile claiming MetroPCS, Sprint is likely to find itself even harder pressed to build out its next-generation network and pitch itself as the dominant low-cost service provider. Sprint’s chief executive, Daniel R. Hesse, has said he expects to participate in mergers within the industry, but few attractive takeover targets remain.

Shares in Leap Wireless International, a smaller competitor often cited as a likely deal partner, plummeted nearly 18 percent on Wednesday, as investors shook off hopes that it would be acquired anytime soon. The company, a prepaid service provider, operates largely in less-attractive markets and is in the midst of a turnaround effort.

“I don’t think that Leap would provide all that much,” Charles S. Golvin, an analyst at Forrester Research, said by telephone.

While some analysts have speculated about whether Sprint would try to outbid T-Mobile for MetroPCS, some industry deal makers were skeptical of the company’s will to revisit a target it had already left at the altar.

Sprint is still scarred by the merger that produced its current incarnation: its 2005 union with Nextel Communications, an example still used in business schools as a classic case of a bad deal.

The tie-up was marred by incompatible phone networks and infighting. As a result, Sprint slipped further behind Verizon and AT&T in market share.

Sprint may still pursue deals, especially as a way to add to its stores of spectrum, without resorting to full-on mergers. Analysts and deal specialists say one potential seller is Clearwire, which already helps provides a high-speed data network to Sprint.

Another is Dish Network, which has an abundance of spectrum but has been unable to set up its own mobile phone network. The company’s chairman, Charles W. Ergen, hinted at an industry conference that with T-Mobile out of the running as a potential partner, he would be open to others.

“Sometimes when one door closes, a window opens somewhere else,” he said, according to a report in The Denver Post.

Analysts have floated one more, bolder, possibility: buying the newly enlarged T-Mobile, creating a third major company to combat Verizon and AT&T. Industry bankers disagree on whether such a deal would be opposed by the Federal Communications Commission.

Brian X. Chen contributed reporting.

DealBook: T-Mobile Seals Deal With MetroPCS

Mark Lennihan/Associated PressA T-Mobile store in New York.

The parent company of T-Mobile agreed to buy MetroPCS on Wednesday, as the cell phone providers look to compete with bigger rivals.

The merger is aimed at making T-Mobile a more robust competitor to Sprint Nextel, particularly in low-cost cellphone service. The deal will also help T-Mobile gain more customers and resources to build out a next-generation data network.

Under the terms of the complex transaction, MetroPCS will conduct a 1-for-2 reverse stock split and pay out $1.5 billion in cash to its existing shareholders, or about $4.09 a share. It will then issue new stock worth about 74 percent to T-Mobile’s parent, Deutsche Telekom, leaving existing MetroPCS investors with a 26 percent stake.

“The T-Mobile and MetroPCS brands are a great strategic fit – both operationally and culturally,” René Obermann, the chief executive of Deutsche Telekom, said in a statement. “The new company will be the value leader in wireless with the scale, spectrum and financial and other resources to expand its geographic coverage, broaden choice among all types of customers and continue to innovate.”

The cell phone carrier is bulking up in the face of increased competition. The combined company, which will be named T-Mobile, will have nearly $25 billion in revenues and $6.3 billion in profits. T-Mobile expects to wring out $6 billion to $7 billion in cost savings.

Oliver Berg/DPA, via Agence France-Presse — Getty ImagesRene Obermann, chief of Deutsche Telekom.

More importantly, T-Mobile will add to its customer base. With 42.5 million users, the combined company will significantly close the gap with Sprint, the No. 3 player with 56.4 million customers.

Morgan Stanley advised Deutsche Telekom’s board, while Lazard advised the German telecom’s management team. Legal advice was provided by Wachtell, Lipton, Rosen & Katz, Cleary Gottlieb Steen & Hamilton, K&L Gates, and Wiley Rein.

MetroPCS was advised by JPMorgan Chase, Credit Suisse and the law firms Gibson, Dunn & Crutcher, Paul Hastings and Telecommunications Law Professionals. A special committee of its board was advised by Evercore Partners and the law firms Akin Gump and Fulbright & Jaworski.