T-Mobile’s MetroPCS Merger Opponents Gaining Traction

Opposition to T-Mobile USA Inc.’s merger with MetroPCS Communications Inc., bolstered by two shareholder-advisory firms spurning the deal, is gaining momentum leading up to next week’s vote on the transaction.

P. Schoenfeld Asset Management LP, a MetroPCS investor that has led a challenge to the deal, scheduled a webcast for April 4 to explain its position to other shareholders in the wireless carrier. Institutional Shareholder Services and Glass, Lewis & Co. came out against the transaction last week, while Egan-Jones Proxy Services was in favor.

The decisions put more pressure on T-Mobile parent Deutsche Telekom AG to offer better terms than the current proposal. MetroPCS shareholders are being asked to approve a reverse merger creating a publicly traded company 74 percent owned by the German phone carrier.

“DT has to sweeten,” said Jonathan Chaplin, an analyst at New Street Research in New York. “DT would be crazy to let it go to a vote. There’s no way they will win. They don’t have enough votes to get a deal done.”

Critics suggest the merger will load up the new company with too much debt, while supporters say it’s the best way for MetroPCS to compete. MetroPCS’s top shareholder, Paulson & Co., is against the deal, while Madison Dearborn Partners LLC, the second-biggest, is for it, making the recommendations of the advisory firms even more crucial since they influence how the remaining investors will vote.

U.S. Comeback

“Two of the most highly respected corporate governance advisory firms have now come out against the merger,” P. Schoenfeld Asset Management said in a statement. “It is time for PCS management to re-examine the terms of the proposed transaction and other alternatives available to the company, such as remaining as a stand-alone business.”

The proposal would unify the fourth- and fifth-largest U.S. wireless carriers, and it represents a key part of Deutsche Telekom’s effort to stage a U.S. comeback. Its T-Mobile division ranks a distant No. 4 to Verizon Wireless, AT&T Inc. and Sprint Nextel Corp., and it lost 2.1 million monthly contract subscribers last year.

MetroPCS reiterated its plea to support the deal today, saying the merger offers “both immediate and long-term compelling economic value” to investors.

“The combined company will be the leading value carrier in the U.S. wireless marketplace and will be able to compete more effectively against the other national wireless competitors,” it said in a letter to shareholders. The carrier will also be in “a better position to participate in future industry growth and consolidation,” MetroPCS said, signaling that the merger could be a prelude to a larger deal.

‘Clinched It’

Investors are slated to vote on the proposed combination on April 12. Chaplin of New Street Research said his recent meetings with shareholders convinced him it would be difficult for MetroPCS to win approval for the deal. “And then the ISS report pretty much clinched it,” he said. He has a neutral rating on the mobile-phone carrier.

ISS said it opposed the deal because of unfavorable terms and the potential for MetroPCS to thrive as an independent company. MetroPCS could bolster its network by acquiring more wireless airwaves and it may be the target of additional merger offers in the future, the Rockville, Maryland-based firm said in a report.

“The question remains, ‘Why now?’” ISS said. “Absent merging with T-Mobile, PCS will still have $1.5 billion of cash to dedicate to new spectrum in some way and could continue operating as a stand-alone company.”

Wireless Coverage

While the merger is “strategically compelling,” shareholders shouldn’t be satisfied with the agreement because it “appears to undervalue MetroPCS’s contribution to the combined company,” Glass Lewis said.

Egan-Jones said the combination would increase the size and quality of the carrier’s wireless coverage and help it respond to growing demand for faster mobile-data services.

Deutsche Telekom remains convinced that the deal will benefit both carriers’ shareholders and that it will be approved on April 12, said Philipp Kornstaedt, a spokesman for the Bonn-based company. He declined to say whether Deutsche Telekom may offer improved terms to MetroPCS shareholders.

Heavy Burden

Deutsche Telekom, Germany’s biggest phone company, would own almost three-quarters of the new business after making a $1.5 billion cash payment to MetroPCS shareholders. The German company also would loan $15 billion to the entity. The resulting level of debt -- and the relatively high, 7 percent projected interest rate -- would be a heavy burden, according to P. Schoenfeld Asset Management and other opponents.

The way the deal is structured, the combined company would be valued at $7 to $8 a share, Chaplin said. That compares with MetroPCS’s closing share price of $11.05 today, up 1.4 percent at the close in New York. Shares of the Richardson, Texas-based company have fallen 19 percent since Oct. 2, the day before the merger was announced, signaling that investors are unhappy with the terms.

If Deutsche Telekom doesn’t improve its offer, MetroPCS may have few additional options. The company said this week that no other bidders have emerged willing to counter T-Mobile’s offer.

MetroPCS could go it alone, though it’s increasingly difficult to compete with the major carriers. Analysts estimate that the company’s revenue will drop 1 percent to $5.07 billion this year, while net income slides 36 percent, according to data compiled by Bloomberg.

MetroPCS’s board approved the merger and has urged a yes vote so the carrier can mount a stronger challenge to the top carriers -- even if the new company would still be relatively small. The combination would create a carrier with 42.3 million customers, less than half the size of Verizon Wireless or AT&T.

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