ISS Recommends MetroPCS Shareholders Vote Down Proposed Merger with T-Mobile USA

Proxy advisory firm Institutional Shareholder Services (ISS) said MetroPCS shareholders should vote against the proposed merger with T-Mobile USA, arguing Wednesday in a report that MetroPCS shareholders would receive a “lower equity split than justified” and that MetroPCS could “continue to thrive” as a standalone company. Under the current deal, MetroPCS shareholders would receive $1.5 billion in cash and 26 percent ownership of the merged carrier (CD Oct 4 p1). The ISS recommendation will likely prompt T-Mobile owner Deutsche Telekom to modify the current deal terms in order to win approval when MetroPCS shareholders meet April 12, industry analysts say.

The estimated value of MetroPCS’s assets when combined with T-Mobile should entitle MetroPCS shareholders to a 37 percent ownership stake, ISS said. A combined T-Mobile/MetroPCS would be worth $11.32 per share, while MetroPCS would be worth about $11.75 per share as a standalone company -- relatively equal in value, but “in the wrong direction for this transaction,” ISS said. “This would imply that a combined T-Mobile/PCS is worth approximately what PCS is worth on its own. Effectively, for the same price, shareholders can own PCS as it stands today -- a company with strong recent operating performance, a low-risk debt profile, and controlled by its current shareholders -- or own a share of the combined company -- a company facing a difficult turnaround, with a higher leverage ratio and greater interest burden, and controlled by” Deutsche Telekom.

The combined carrier’s debt would include T-Mobile’s current $15 billion in debt -- a concern raised by Paulson & Co. and P. Schoenfeld Asset Management, who combined own slightly more than 12 percent of MetroPCS. Both companies have publicly opposed the deal, with Paulson saying Wednesday that T-Mobile should “significantly reduce the debt they are taking back and/or dramatically increase MetroPCS’s proforma share of the combined company” to win shareholder support (CD March 28 p9). ISS also noted the “negative market response” to the deal, which had resulted in MetroPCS’s stock value dropping 14.4 percent between the deal’s announcement and March 11. MetroPCS shares closed up more than 3.5 percent at $10.90 Thursday.

MetroPCS said in a statement that it’s disappointed in the ISS report, claiming it “contains material flaws and reaches the wrong conclusion.” MetroPCS said proxy advisory firm Egan Jones recently recommended MetroPCS shareholders vote in favor of the proposed merger. The Egan Jones recommendation “supports our belief that this proposed combination is the best strategic alternative for the company and its stockholders and will maximize value for MetroPCS’ stockholders,” MetroPCS said. “If stockholders vote against the proposed combination, MetroPCS stockholders will not enjoy its compelling benefits, which could lead to a loss of value for MetroPCS stockholders, and there is no assurance that MetroPCS will be able to deliver the same or better stockholder value” (http://bit.ly/170HX0f). Deutsche Telekom and T-Mobile had no comment on the ISS report, a spokeswoman said.

The ISS recommendation makes it “highly unlikely the deal will be approved as-is,” so Deutsche Telekom is likely to improve its offer, New Street Research analyst Jonathan Chaplin said Thursday in an email to investors. MetroPCS shareholders will likely require T-Mobile to reduce the amount of debt it will bring to the combined carrier, allow for “less onerous terms” to retire the remaining debt and institute changes in the combined carrier’s governance plan, Chaplin said. Deutsche Telekom will need to make concessions on those issues, since it “can’t walk away” from the transaction, he said. “We don’t see an alternative transaction that would provide the same benefits,” Chaplin said. “The only transaction that would be better would be a merger with Sprint; however, we don’t think this is at all likely in the near-term.” Sprint Nextel is “far more likely” to bid for MetroPCS if T-Mobile does not improve its offer, he said.

T-Mobile’s recently announced “Un-carrier” strategy, including its Simple Choice Plan and its plans to start selling iPhone devices April 12, “all were built on the assumption the carrier would have a much deeper spectrum position than it has now as a stand-alone company” -- an additional incentive for Deutsche Telekom to revise the merger deal’s terms, said Wells Fargo analyst Jennifer Fritzsche in an email to investors. If the proposed merger does fall through, it would give Sprint a “better chance to position itself as the value player in the market place,” she said. While Sprint could make a bid for MetroPCS if the T-Mobile merger deal fails, its priority must remain getting its deals with SoftBank and Clearwire approved, Fritzsche said.