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Wednesday, 27 August 2014

Don’t hang up

MetroPCS owners can forget a standalone option

MetroPCS owners should forget about a standalone option. Dissident investors John Paulson and Peter Schoenfeld persuaded two proxy services that the cellphone operator is selling out on the cheap to rival T-Mobile USA and that independence is a better option. While the agitating may bring a sweeter bid, MetroPCS is unlikely to prosper or exist for long on its own.

The activists claim - and Institutional Shareholder Services and Glass Lewis agree - that the merger short-changes MetroPCS shareholders. They will wind up with just 26 percent of the combined company. An integral part of the evaluation is $1.5 billion MetroPCS raised in 2010 to buy wireless spectrum that has gone unspent.

The cash is being returned to MetroPCS investors as part of the deal. P. Schoenfeld Asset Management argues that deducting this amount before calculating the equity split is unfair since all cellular companies need to buy spectrum. Leave it in, and MetroPCS should get 37 percent, assuming both companies are worth about five times estimated EBITDA.

T-Mobile’s network, however, is in better shape and underused. Discounting the cash, therefore, makes the proposed equity split seem reasonable enough.

There’s also the question of over $15 billion of debt provided by T-Mobile’s parent company, Deutsche Telekom. The rate may end up over 7 percent, but it’s not obvious there was - or is - another way to finance the deal. It’s not a far cry from what MetroPCS paid to borrow last month. And up to $7 billion of synergies make the debt worthwhile.

The case about valuation may be reasonable, but making one for independence is not. MetroPCS lost more than 400,000 customers last year and may keep shrinking. Bigger companies can buy the best spectrum, use it more efficiently, get preferential access to new handsets and implement powerful advertising campaigns. They usually earn more, too: AT&T’s estimated 2013 return on assets is almost twice as high as what’s forecast for MetroPCS.

Subscriber growth overall is sluggish and capital intensity rising. Small fries like MetroPCS can’t keep up. Investors may think their company could be worth more to Sprint or even possibly Dish Network one day. Given the industry dynamics, that’s a risky proposition - and rejecting T-Mobile for a standalone future is even more so.

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Proxy advisory firm Glass Lewis said on March 29 that shareholders of MetroPCS should vote against a reverse merger with T-Mobile USA because it undervalues their contribution to the combined company. The recommendation follows a similar one from larger rival Institutional Shareholder Services on March 27.

P. Schoenfeld Asset Management, which owns about 2.5 percent of MetroPCS, has been agitating against the deal, filing proxy materials. The company’s biggest investor, Paulson & Co, a 9.9 percent stakeholder, also has said it will vote against the merger. Madison Dearborn, with an 8.3 percent stake, supports the deal.

Under the terms of the transaction, MetroPCS will declare a two-for-one reverse stock split, make a cash payment of $1.5 billion to its shareholders (approximately $4.09 per share before the reverse stock split) and acquire all of T-Mobile’s capital stock by issuing to Deutsche Telekom 74 percent of MetroPCS common stock on a pro forma basis.

Deutsche Telekom has also agreed to roll its existing intercompany debt into $15 billion of new senior unsecured notes of the combined company and provide a $5.5 billion backstop commitment for certain MetroPCS third-party financing transactions.

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