In granting permission for mobile carriers MetroPCS (NYSE:PCS) and Deutsche Telekom’s (DTEGY.PK) T-Mobile to join forces, the U.S. Justice Department wrote that the deal was “unlikely to harm consumers or substantially lessen competition.” But it seems that federal regulatory approval should have been only a secondary concern to the complaints that MetroPCS shareholders are laying out as obstacles on the road to a possible merger.
It is true that the approval of the Justice Department and the Federal Communications Commission brings the deal one step closer to reality — after all the two regulators effectively changed their stance since tabling AT&T’s (NYSE:T) attempted merger with T-Mobile two years ago.
The rapidly growing smartphone market in the United States has created a massive hunger for data, and this ravenousness has made wireless service providers, in turn, need to scoop up more and more spectrum to support customers’ increased bandwidth use. The primary means available to wireless carriers to grab up more spectrum is to make acquisitions or merge with spectrum-rich companies. But as this process inevitably results in industry consolidation, U.S. regulatory agencies have kept such moves to a minimum.
In denying AT&T permission to purchase T-Mobile in 2011, the United States government explained that it had blocked the deal in order to protect the American consumer from anti-competitive practices to which industry consolidation can lead…
“The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the U.S. wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled,” stated the press release issued jointly by both agencies.
Regulators saw the MetroPCS-T-Mobile merger in a different light, and now that MetroPCS has them convinced, the company must persuade its shareholders that the deal is their best interest. It’s a tough sell; the reverse stock split — which will reduce the number of issued shares in return for a proportional increase in the share price — will enable MetroPCS to effectively swallow its larger rival, but it will also result in Deutsche Telekom shareholders owning 74 percent of the combined company.
MetroPCS stressed that the economic terms are “compelling” in a letter sent to its shareholders on Tuesday, and focused on the fact that the merger will solve the company’s critical spectrum needs and competitive disadvantages…
The letter stresses this point in heavily optimistic terms. “The immediate cash payment you will receive and the significant ownership interest you will hold in the combined company represent a substantial premium to MetroPCS’ stand-alone value, and your meaningful ownership in the combined company will allow you to participate in the potential synergies and value created by this combination,” it read. Shareholders will vote on April 12.
But even though the prepaid wireless-service provider’s fourth-quarter earnings plunged 65 percent — due to subscriber loss and higher expenses — and outweighed a slight increase in revenue, shareholders have not yet warmed to the merger.
The main problem is debt. Hedge fund Paulson & Co., MetroPCS’s largest shareholder, and P. Schoenfeld Asset Management have argued that the financial burden that will land on the company as a result of the deal will prevent it from effectively competing with its rivals.
But MetroPCS addressed this concern in its letter to shareholders as well. That leverage will be too great is a misconception, wrote the company, it is in fact “appropriate for the combined company and is in-line with peers and MetroPCS’ historical average.” The company went on to say that the debt terms “are market-based and represent a favorable deal for the combined company.”
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