Breaking News

Tweet TWEET

P. Schoenfeld Asset Management Intends To Vote Against MetroPCS Merger

    P. Schoenfeld Asset Management Intends To Vote Against MetroPCS Merger

PR Newswire

NEW YORK, Feb. 7, 2013

NEW YORK, Feb. 7, 2013 /PRNewswire/ --P. Schoenfeld Asset Management LP
("PSAM") sent a letter on January 30th to the Board of Directors at MetroPCS
Communications Inc. ("PCS") and the Supervisory Board at Deutsche Telekom AG
("DT") outlining issues related to the current structure of the proposed terms
for the reverse merger between PCS and T-Mobile USA ("T-Mobile").

In the letter PSAM stated its belief that:

1. The new combined company ("PCS/T-Mobile") is not appropriately and fairly
capitalized;

2. The interest rate on DT's debt financing is far above market, based on
PCS/T-Mobile's anticipated credit rating; and

3. The exchange ratio is unfair to PCS stockholders.

PSAM stated that it intends to vote against the transaction in the absence of
changes to the deal terms since PSAM is of the view that it would be better
for PCS to remain a stand-alone company while examining opportunities to
consummate alternative transactions, than to accept the package of cash and
securities being offered to PCS stockholders.

Full text of the letter is attached.

About PSAM
P. Schoenfeld Asset Management LP (together with its affiliates, "PSAM") was
founded by Peter M. Schoenfeld and has been providing investment advisory
services since 1997. PSAM invests on behalf of its clients in both equity and
credit securities in global event driven opportunities, including:
international consolidations, corporate restructurings, spin-offs,
divestitures, and stressed and distressed credits. PSAM has offices in New
York and London, which are registered with the SEC and authorised and
regulated by the FSA, respectively.

For Investor Inquiries:
Arthur Crozier/Scott Winter
Innisfree M&A Incorporated
(212) 750-5833

For Media Inquiries:
Steve Bruce/Catherine Jones
ASC Advisors
(203) 992-1230

P. SCHOENFELD ASSET MANAGEMENT LP (TOGETHER WITH CERTAIN OF ITS AFFILIATES,
"PSAM") INTENDS TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"SEC") A DEFINITIVE PROXY STATEMENT AND ACCOMPANYING PROXY CARD IF PSAM
PROCEEDS WITH THE SOLICITATION OF PROXIES FROM THE STOCKHOLDERS OF METROPCS
COMMUNICATIONS, INC. ("METROPCS") IN CONNECTION WITH A SPECIAL MEETING OF SUCH
STOCKHOLDERS TO BE HELD TO VOTE UPON A PROPOSED TRANSACTION BETWEEN METROPCS
AND T-MOBILE USA, INC. INFORMATION RELATING TO PSAM AND THE OTHER
PARTICIPANTS IN ANY SUCH SOLICITATION WILL BE INCLUDED IN MATERIALS FILED ON
FEBRUARY 7, 2013 BY PSAM WITH THE SEC PURSUANT TO RULE 14A−12 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. STOCKHOLDERS OF METROPCS ARE
ADVISED TO READ ANY SUCH DEFINITIVE PROXY STATEMENT AND OTHER DOCUMENTS
RELATED TO ANY SUCH SOLICITATION WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION, INCLUDING ADDITIONAL INFORMATION RELATED TO THE
PARTICIPANTS IN ANY SUCH SOLICITATION. WHEN COMPLETED, ANY SUCH DEFINITIVE
PROXY STATEMENT AND PROXY CARD WILL BE FURNISHED TO SOME OR ALL OF THE
STOCKHOLDERS OF METROPCS AND WILL, ALONG WITH OTHER RELEVANT DOCUMENTS, BE
AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. IN
ADDITION, PSAM WILL PROVIDE COPIES OF THE DEFINITIVE PROXY STATEMENT AND
ACCOMPANYING PROXY CARD (WHEN AVAILABLE) WITHOUT CHARGE UPON REQUEST.

January 30, 2013
Members of the Board of Directors    Members of the Supervisory Board
MetroPCS Communications Inc.         Deutsche Telekom AG
2250 Lakeside Boulevard              Postfach 2000
Richardson, TX 75082                53105 Bonn, Germany

Dear Board Members:

P. Schoenfeld Asset Management LP ("PSAM") is an investment adviser that
focuses on event-driven and fundamental investment opportunities. We have
been providing investment advisory services to clients since 1997. Our
clients are shareholders of MetroPCS Communications Inc. ("PCS") and own an
aggregate position of approximately 7,500,000 shares.

We have closely reviewed the recently announced reverse merger between PCS and
T-Mobile USA ("T-Mobile"), a wholly-owned subsidiary of Deutsche Telecom
("DT"), which we will be asked to vote upon shortly. Based on our review, we
believe that:

1. The new combined company ("PCS/T-Mobile") is not appropriately and fairly
capitalized;

2. The interest rate on DT's debt financing is far above market, based on
PCS/T-Mobile's anticipated credit rating; and

3. The exchange ratio is unfair to PCS stockholders.

In the absence of changes to the dealterms that address these points, we
question whether the transaction deserves the support of PCS stockholders.
We are presently of the view that it would be better for PCS to remain a
stand-alone company while examining opportunities to consummate alternative
transactions, than to accept the package of cash and securities being offered
to PCS stockholders. Based on the trading level of PCS stock, it appears that
other investors share our opinion. The current PCS market price is
approximately equal to the price at which PCS traded before the deal was
announced and represents a substantial discount to highs reached in 2011. As
you know, it is highly unusual for shareholders of an acquired company to
receive no acquisition premium.

We have identified the following issues that need to be modified, before the
deal is, in our view, supportable:

1.The proposed capital structure of PCS/T-Mobile is poorly conceived, with
debt levels that we believe are unsustainable and value destructive for all
constituents.

a.In its current configuration, PCS/T-Mobile will have $23.3 billion in total
debt and leases, comprised of the following:

Proposed Capital Structure
DT Intercompany Debt       $15,000  Total Debt + Leases               $23,300
DT Revolver (undrawn)      $0       Net Debt + Leases                 $21,500
Existing Metro Bank Loan   $2,500
Existing Metro Bonds       $2,000   Total Debt + Lease / 2013E EBITDA 3.9x
New Bonds                  $1,000   Net Debt + Lease / 2013E EBITDA   3.6x
Total NewCo Debt           $20,500
Lease Obligations:
T-Mobile                   $2,400
Metro                      $400
Total                      $2,800
Expected Cash              $1,800

b. PCS/T-Mobile's proposed capital structure entails a net debt (including
leases)/2013E EBITDA ratio of 3.6x (adjusting for the special dividend) –
which compares to 2.7x for PCS stand-alone. This also compares unfavorably to
the other following comps:

                                           Total Debt /       Net Debt /
Bond                            Yield      2013E              2013E
                                           EBITDA^1           EBITDA^1 2
SPRINT NEXTEL 7.000% Notes due  5.3%       4.8x               2.2x
2020
METROPCS WIRELES 6.625% Notes   5.5%       3.5x               2.7x
due 2020
CRICKET COMMUNIC 7.750% Notes   7.0%       5.6x               4.5x
due 2020
T-MOBILE USA^3 (Current)        4.1%       3.3x               3.2x
1) EBITDA based on analyst's
consensus estimates
2) Sprint adjusted for Softbank & Clearwire transactions / Metro PCS adjusted
for $1.5 billion capital expenditure
3) T-Mobile Yield calculated based on the annualized "interest expense to
affiliates" for the 9 months ended 9/30/12divided by average debt balance

c. We anticipate the credit rating on PCS/T-Mobile will be BB, which is
substantially below investment grade. The risk associated with this lower
credit rating and high debt levels will depress equity multiples and hence
stock values for both DT and the public PCS/T-Mobile holders.

d. A reduction in the gross amount of intercompany debt from PCS/T-Mobile to
DT will result in net value creation to DT as well. For every $1 billion of
debt eliminated from the intercompany debt, DT's investment will be improved
as follows:

i. Total equity value will automatically increase by $1 billion due to lower
debt levels, or approximately $0.71 per share; and

ii. PCS/T-Mobile equity ratings and multiples will expand as a result of the
risk mitigation associated with debt reduction.

2. The terms of the intercompany debt owed by PCS/T-Mobile to DT are
unreasonable and confiscatory.

a. The interest rate ("projected average yield") on approximately $15 billion
of rolled intercompany debt owed by PCS/T-Mobile to DT is preliminarily set at
8%^1, which we see as having no basis in current market reality. This
intercompany interest expense will be approximately $1.2 billion per year.
PCS current rates are only approximately 5.5%. T-Mobile's latest financial
statements for the interim nine month period ending September 30, 2012 show
T-Mobile's existing intra-company notes as having a fair market value in
excess of par and a coupon rate of only ~4.1%. Half of the total
intra-company notes have a maturity in excess of five years.

b. Every 1% of interest rate reduction will result in approximately $100
million of incremental free cash flow, or $0.07 of incremental free cash flow
per share -- approximately $0.70 of incremental value per share at a 10x
multiple. Setting the intercompany debt rates at market, of approximately
5.5%, would result in nearly $240 million in aggregate annual savings on
interest expense and approximately $1.72 of incremental value per share at a
10x multiple.

c. In light of (i) DT's failure to optimize the PCS/T-Mobile capital structure
and (ii) the off-market rates of the intercompany debt, we wonder if DT is
using this vehicle to arbitrage the difference between its ~2.5% cost of
borrowing and the 8% rate expected to be paid by PCS/T-Mobile.

d. The lower debt levels and reduced interest expense would also allow
PCS/T-Mobile to begin paying a meaningful dividend in 2014. Among the major
domestic and Western European telco carriers, only Sprint (which until the
proposed Softbank capital infusion had severe debt problems) and the most
distressed Western European carriers do not pay a dividend. A capital
structure designed from the outset not to accommodate dividends is clearly not
in the interests of all shareholders and calls into question if the Board of
Directors has satisfied its fiduciary responsibilities to maximize value for
its shareholders. Replicating the debt structure of troubled companies seems
to be misguided.

^1 T-Mobile investor presentation dated October 3, 2012 referenced a
"projected weighted average yield of 8%". Current estimated interest rates for
the $15.0 billion intercompany debt stated in the proxy filing dated January
25, 2013 are 8.16% for the $7.5 billion of "permanent notes" and 7.28% for the
$7.5 billion of "reset notes" making an average yield of 7.72%.

Illustrative Debt Restructuring Example
                                                 Current   Proforma  Change
Illustrative Debt Reduction of $2.0 billion
2013E EBITDA (proxy filing)                      $5,918    $5,918    -
EBITDA Multiple                                 5.0x   5.0x   -
Enterprise Value                                 $29,590   $29,590   -
(+) Cash                                         1,800     1,800     -
(-) Intercompany Debt                            (15,000)  (13,000)  2,000
(-) Other Debt                                   (5,500)   (5,500)   -
(-) Leases                                      (2,800)   (2,800)   -
Equity Value                                     $8,090    $10,090   $2,000
Estimated Shares Outstanding (before reverse     1,414     1,414     -
split)
Price Per Share Impact                           $5.72     $7.14     $1.41
Illustrative Interest Rate Reduction
Proforma Intercompany Debt                       13,000    13,000
Interest Rate                                    8.00%     5.50%
Post-Tax Interest Expense @ 35% Rate             $676      $465      $211
EPS / Cash Flow Per Share Impact                 $0.48     $0.33     $0.15
Expected P/E Multiple                                                10.0x
Price Per Share Impact                                               $1.49
Multiple Expansion
Intercompany Debt                                15,000    13,000
Interest Rate                                    8.00%     5.50%
Post-Tax Interest Expense @ 35% Rate             $780      $465      $315
EPS / Cash Flow Per Share Impact                 $0.55     $0.33     $0.22
2013E Consensus EPS^1                                                $0.22
Proforma EPS                                                        $0.44
P/E / Cash Flow Multiple Expansion                                   1.0x
Price Per Share Impact per 1.0x                                      $0.44
Total Value Per Share Impact                                         $3.35
Estimated Shares Owned by DT (before reverse                         1,046
split)
DT Change in Equity Value                                            $3,507
(-) Reduction in Intercompany Debt                                   ($2,000)
Value Increase (Decrease) to DT                                      $1,507
1) Consensus EPS for T-Mobile calcualted from an average of analyst's EBITDA
estimates minus estimated
depriciation, interest expense and taxes

3. DT should commit to selling down its PCS/T-Mobile stake below 49% so
PCS/T-Mobile can issue additional secured debt (thereby reducing its interest
burden even further) and PCS/T-Mobile equity liquidity will be enhanced.

a. We understand that DT is prohibited from using low cost secured debt from
third parties at PCS/T-Mobile until it owns less than 49% of the new company.
DT either needs to revise its own debt agreements or reduce its ownership of
PCS/T-Mobile, but it is not reasonable to penalize the other shareholders of
PCS/T-Mobile with a sub-optimal capital structure that only exists due to
restrictions that are unique to DT.

b. PCS currently has a $2.5 billion secured bank loan with an average interest
rate of 4.6% as of September 30, 2012. We estimate that PCS/T-Mobile, if
unburdened by these DT constraints, could issue at least $11.0 billion of
secured debt with a floating rate of Libor plus 250 basis points (2.8%) or a
swapped rate of 3.8% fixed. Even the higher rate would generate $460 million
of interest expense savings relative to the 8% intra-company debt.

4. The current 26% PCS/T-Mobile equity stake being offered to PCS
shareholders implies an unwarranted multiple differential between PCS and
T-Mobile.

a. Based on the profitability and growth rate of its business, PCS should be
valued at an EBITDA multiple at least as high as T-Mobile. Taking into account
the obligation to pay PCS stockholders an acquisition premium, we think that
PCS should be valued at a higher EBITDA multiple than T-Mobile. But if valued
even at equivalent multiples, there is a need for a major revision in the
exchange ratio.

b. Using an equivalent 5.0x forward EBITDA multiple for both companies, we
would suggest the following equity split, resulting in 37% of PCS/T-Mobile for
PCS shareholders: 

                                              PCS          T-Mobile  Proforma
2013E EBITDA (proxy filing)                   $1,359       $4,559    $5,918
EV / EBITDA Mult.                             5.0x      5.0x
Enterprise Value                              $6,795       $22,795   $29,590
(+) Cash^1                                    2,565        $735      $3,300
(-) Dividend Adj                              (1,500)      -         (1,500)
(-) Debt                                      (4,500)      (16,000)  (20,500)
(-) Leases                                    (400)        (2,400)   (2,800)
Equity Value                                  $2,960       $5,130    $8,090
Implied Equity Split                          37%          63%       100%
1) Cash at T-Mobile solved for to equal $1.8 billion for the proforma company
as stated in the
T-Mobile investor presentation dated October 3, 2012

c. Based on the methodology shown above, the 74% interest in PCS/T-Mobile
granted to DT would only make sense if the debt level on existing T-Mobile,
and by extension PCS/T-Mobile, was reduced by $3.5-4.0 billion, through the
elimination of intercompany debt in that amount being issued to DT.

d. The adjusted book value of T-Mobile, after accounting for the goodwill
impairment charge in the third quarter of 2012 and the distribution of the
tower transaction proceeds in the fourth quarter of 2012 was significantly
less than the implied value of the merger consideration. We believe that DT
should explain the gap in light of the fair market value appraisal that is
part of impairment accounting.

To summarize, we believe that the current proposed terms for the reverse
merger between PCS and T-Mobile are unattractive relative to a potential
stand-alone alternative and that the current structure of the transaction is
unsupportable. For the reasons we have outlined above, we believe that DT has
burdened PCS/T-Mobile with too much intercompany debt, at terms that are not
based on any market reality. While these terms are unattractive to us as PCS
shareholders, we also believe that DT, as a 74% PCS/T-Mobile shareholder
would, on a net basis, benefit from an outright reduction of the intercompany
debt burden and a lowering of the intercompany interest rate. Moreover the
proposed equity split is not supported by the relative values of the two
companies and gives no weight to the obligation to give PCS stockholders an
acquisition premium, reflecting the sale of control to DT.

We urge the Boards of Directors and their advisors to rectify the imbalances
cited for the benefit of both sets of shareholders.

We are available to discuss this at your convenience and would welcome the
opportunity to meet with you and share with you the back-up for the
conclusions we have reached.

Sincerely,

Peter Schoenfeld    Douglas Polley  Richard Bilotti
Chief Executive Officer Portfolio                   Head of Special
                                  Manager         Situations

Members of the Board of Directors of MetroPCS Communications Inc.

Roger D. Linquist, Chairman
W. Michael Barnes
Jack F. Callahan, Jr.
C. Kevin Landry
Arthur C. Patterson
James N. Perry, Jr.

Members of the Board of Management of Deutsche Telekom

Rene Oberman, Chairman
Reinhard Clemens
Niek Jan van Damme
Timotheus Hottges
Thomas Kremer
Claudia Nemat
Marion Schick

Members of the Supervisory Board of Deutsche Telekom

Sari Baldauf
Dr. Wulf H. Bernotat
Dr. Hans Bernhard Beus
Dr. von Grunberg
Lawrence H. Guffey
Prof. Dr. Ulrich Lerner
Dagmar P. Kollmann
Prof. h.c. (CHN), Dr.-Ing. E.h.Dr. Ulrich Middelmann
Dr. Ulrich Schroder
Dr. h.c. Bernhard Walter
Monika Brandl
Klaus-Dieter Hanas
Sylvia Hauke
Lothar Holzwarth
Hans- Jurgen Kallmeier
Petra Steffi Kreusel
Waltraud Litzenberger
Lothar Schroder
Michael Sommer
Sibylle Spoo





SOURCE P. Schoenfeld Asset Management (PSAM)
 
Press spacebar to pause and continue. Press esc to stop.