MetroPCS Communications Inc. (PCS)’s largest shareholder, Paulson & Co., said it now supports a merger with Deutsche Telekom AG (DTE)’s T-Mobile USA Inc. after the offer was revised yesterday to include less debt.
Deutsche Telekom sweetened the terms of the October merger proposal in an effort to placate shareholders such as Paulson, who had opposed to original bid. In what it called a “best and final offer,” Deutsche Telekom cut the amount of debt it’s imposing on the combined company by $3.8 billion. The Bonn-based company also lowered the interest rate it plans to charge on the loan by half a percentage point.
“While Paulson needs to review the revised proxy statement before making a final decision, Paulson intends to vote for the merger as restructured,” the firm, founded by billionaire John Paulson, said today in a statement.
The transaction had faced opposition from investor-advisory firms and several of MetroPCS’s largest shareholders, who were concerned the new company would be loaded with too much debt. MetroPCS agreed yesterday to delay a vote on the transaction to April 24 to evaluate the new terms, which would cut the loans to $11.2 billion from $15 billion. Investors in the Richardson, Texas-based company had been scheduled to meet tomorrow.
“This puts the new company under less pressure and gives them more strategic flexibility,” said Jonathan Chaplin, an analyst with New Street Research LLP in New York. With less of a debt burden, the new company can more easily afford to make network investments and acquire more wireless airwaves, he said.
Deutsche Telekom also extended the lockup period during which it’s barred from publicly selling shares in the combined company. The time frame will now be 18 months, up from six. That may reassure investors that the German company doesn’t plan to cut and run.
Deutsche Telekom has an “enduring commitment” to the U.S. market, Philipp Kornstaedt, a company spokesman, said today. The extended lockup period underlines this pledge, he said.
The merger would combine the fourth- and fifth-largest U.S. wireless carriers, creating a stronger competitor to market leaders Verizon Wireless and AT&T Inc. MetroPCS investors will still get $1.5 billion of cash and a 26 percent stake in the new entity, terms that are unchanged from the October proposal, Deutsche Telekom said in its statement.
“This improved offer underlines Deutsche Telekom’s commitment to establishing a new, stronger competitor in the U.S. mobile communications market,” the company said. It reiterated a prediction that the merger will generate cost savings of $6 billion to $7 billion.
Deutsche Telekom shares climbed 2 percent to 8.79 euros in Frankfurt, reaching the highest price in two months. MetroPCS shares fell 2.2 percent to $11.31 at the close in New York.
P. Schoenfeld Asset Management, the MetroPCS investor that led the fight against the original deal, said it plans to drop its opposition to the merger.
While Deutsche Telekom’s new proposal didn’t address all of its concerns, “these revised terms are the best available alternative for PCS shareholders at this time,” the New York- based firm said today in a statement.
Deutsche Telekom had previously sought to charge an interest rate of about 7 percent -- an excessively high amount, P. Schoenfeld Asset Management had argued.
Roy Behren, another MetroPCS investor who had balked at the previous terms, praised Deutsche Telekom’s latest proposal. He co-manages the $4.7 billion Merger Fund (MERFX) at Westchester Capital in Valhalla, New York.
“This is an excellent development,” said Behren, whose firm filed a lawsuit last month against MetroPCS, seeking a court order from a federal judge to delay the vote. “We look forward to reviewing the full proposal.”
Support for the original deal faltered last month when Institutional Shareholder Services Inc. and Glass, Lewis & Co. - - two influential investor-advisory firms -- criticized the terms of the merger. The certainty of the vote was in question given the stalemate between the two largest shareholders. While Paulson & Co. opposed the offer, No. 2 shareholder Madison Dearborn Partners LLC was in favor of it.
By improving the terms, Deutsche Telekom is seeking to avoid a replay of T-Mobile’s failed deal in 2011, when AT&T walked away from a takeover after facing regulatory scrutiny.
T-Mobile is struggling with subscriber losses and has fallen behind rivals in embracing long-term evolution, or LTE, a faster network technology. To win back market share, T-Mobile CEO John Legere is touting its lower prices and a new installment-plan approach to buying phones.
T-Mobile will begin offering Apple Inc. (AAPL)’s iPhone tomorrow for the first time, becoming the last major U.S. carrier to get the device.
The combination of T-Mobile and MetroPCS would create a company with 42.3 million customers. The deal moved a step closer to completion on March 12, when both the Federal Communications Commission and the Justice Department approved the combination. The following week, the Committee on Foreign Investment in the U.S. approved the transaction.
The sweetened offer should help seal the deal, New Street Research’s Chaplin said.
“I think this is enough,” he said. “They reduced the debt by enough to make this a better deal for MetroPCS shareholders than remaining independent.”