(Source: T-Mobile USA)
Merger will create a strong fourth player in the U.S. market
When AT&T’s (T) $39B acquisition of Deutsche Telekom AG (ETR:DTE) subsidiary T-Mobile USA was shot down by U.S. regulators on antitrust grounds, many feared regulators may have wasted their effort as T-Mobile USA was on the verge of financial failure. Indeed, recent layoffs and customer defections seemed to confirm the worst.
I. Merger Strengthens T-Mobile USA
But in a surprising, MetroPCS Communications Inc. (PCS) and T-Mobile USA announced today that they would be merging into a single value carrier. The deal is slightly complicated financially, but the big picture is that T-Mobile USA will remain independent, although MetroPCS and T-Mobile may be able to enjoy some joint marketing pitches.
The move can be viewed as a partial acquisition of MetroPCS by Deutsche Telecom, which will then be merged it into its struggling U.S. unit T-Mobile.
The financial side of the deal involves MetroPCS splitting its stock (doubling the number of shares), then paying $1.5B USD in direct cash to Deutsche Telecom shareholders, and handing over 74 percent of its stock to Deutsche Telecom shareholders. The combined company (T-Mobile USA + MetroPCS) will have $15B USD in combined unsecured debt notes, and Deutsche Telecom will "provide a $5.5 billion backstop commitment for certain MetroPCS third-party financing transactions."
The deal creates a new carrier with a projected 42.5m subscribers, $24.8B in revenue, $6.3B of adjusted EBITDA (non-GAAP earnings), $4.2B in capital expenditures, and $2.1B of free cash flow (defined as EBITDA less capital expenditures) in 2012.
II. A Different Deal
It is a substantially different route compared to the AT&T deal, which involved a $39B USD cash/stock payment to Deutsche Telecom. That deal would have merged T-Mobile's roughly 30 million customers with AT&T's roughly 100 million customers to produce a mega carrier with 130+ million customers.
MetroPCS was long eyeing a tie-up with T-Mobile USA, and had looked to potentially purchase certain assets/subscriber contracts from the carrier had the AT&T deal been approved.
The new merger makes T-Mobile USA bear a closer resemblance to Sprint Nextel Corp. (S) which has roughly 52 million subscribers (as of Q2) and also has contract-free offerings under the Boost Mobile and Virgin Mobile brands.
The merger also puts pressure on AT&T and Verizon Wireless (a joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD)). It also brings the promise of revived financials to T-Mobile USA. Versus T-Mobile who has long bled money, MetroPCS has a culture of success, posting an impressive $148M USD profit last quarter.
T-Mobile has been stepping up its HSPA+ efforts, but this "3.5G" tech has struggled to compete against the bleeding edge at AT&T and Verizon Wireless -- both of whom have deployed "4G" LTE. That said, it offers some of the best value plans in the industry.
Some details of the deal -- for example how the executive leadership will shake down -- remain unknown, and of course the purchase has to pass regulatory scrutiny. T-Mobile USA recently named John Legere, a three-decade telecom industry veteran, as its new CEO, replacing CEO-of-two-years Phillip Humm who left to become CEO of Verizon Wireless parent Vodafone Europe.
Assuming it gets approved, though, the net result of this merger is simple -- more competition in the mobile market.
Source: BusinessWire
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