With MetroPCS’ shareholders set to vote tomorrow on a proposed merger with T-Mobile USA, Deutsche Telekom altered the arrangements of the deal in an attempt to better tempt those investors that partnering with its U.S. subsidiary is the right thing to do.
In what it boastfully called a “best and final offer to MetroPCS,” DT has reduced the debt burden on MetroPCS by trimming the amount DT shareholders will loan to the new entity by $3.8 billion, lowered the interest rate charged for the loan by 50 basis points and extended the lock-up period on shares of the combined operations held by DT to 18 months after closing. The new terms lower the amount of money being loaned to MetroPCS to $11.2 billion, which should lighten the debt load on the new operations, while the lock-up period was extended from the original 12 months.
Two terms of the original deal remain: a $1.5 billion cash payment being made to MetroPCS shareholders and the final ownership structure of the new entity at 74% controlled by DT and 26% controlled by MetroPCS.
“This improved offer underlines Deutsche Telekom’s commitment to establishing a new, stronger competitor in the U.S. mobile communications market that will offer customers a greater selection of attractively priced products and services on a best-in-class wireless network,” the German telecom giant noted.
A number of investor services recommended that MetroPCS shareholders oppose the deal in its original format, which was dubbed a “reverse-merger” and resulted in MetroPCS maintaining a minority interest in the new operations instead of being acquired outright. DT has been seeking a way to minimize its exposure to the U.S. market, an attempt that was thrawted in late 2011 when government regulators blocked AT&T’s $39 billion acquisition attempt of T-Mobile USA.
Both DT and MetroPCS have been urging investors to approve the deal on its original terms. However financial analysts were expecting DT to eventually alter the terms in order to guarantee approval of the deal. Many noted that DT was already too far down the path to let the merger fall apart and recent announcements by T-Mobile USA regarding its LTE network and new pricing structure were dependant on it bolstering its spectrum portfolio from the MetroPCS deal. MetroPCS’ stock (PCS) was trading down slightly early Thursday.
“By our back of the envelope math, these new terms add north of $3 in additional equity value for [MetroPCS] shareholders (through the debt reduction and lower interest expense),” wrote Wells Fargo Securities senior analyst Jennifer Fritzsche, in a research note. “We believe this will be enough to gain shareholder approval. While we still believe the newly combined entity’s revenue growth objectives remain a bit lofty, starting out with a lower leverage ratio should certainly help its start on stronger footing.”
The Federal Communications Commission approved the deal last month, leaving just MetroPCS shareholder approval for the deal to be completed.
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