by Tom Taulli | May 1, 2013 1:37 pm
T-Mobile US (NYSE:TMUS) — the result of a mega-merger between Deutsche Telekom’s (PINK:DTEGY) T-Mobile USA and MetroPCS (NYSE:PCS) — began trading on the New York Stock Exchange today.
T-Mobile US currently is the nation’s fourth-largest mobile carrier. The combination with MetroPCS follow years of struggles in trying to gain more scale — struggles so serious that the company even tried to sell out to AT&T (NYSE:T).
So will this latest merger move the needle? And more pressing to investors — should you buy T-Mobile US? To see, let’s look at the pros and cons:
Stronger Platform: TMUS has about 43 million subscribers and about 70,000 points of distribution (stores, kiosks and so on). But more importantly, TMUS is investing $4 billion in its LTE network, which will include upgrades to 37,000 sites. By the end of this year, the network will have more than 200 million points of presence (access points) — and that’s critical, since next-gen phones will need LTE to provide services like video streaming and other multimedia experiences.
Merger Synergies: The deal is expected to generate cost synergies of $6 billion to $7 billion. This will include cuts in headcount (because of duplication) and leverage for marketing expenditures. On a combined basis, TMUS would have generated revenues of $24.8 billion and adjusted EBITDA of $6.4 billion in 2012. For the next five years, the company forecasts revenues to grow by 3% to 5% and EBITDA to grow about 7% to 10%.
Deal Potential: If anything, TMUS might have a strong floor, as it still could be an eventual buyout target itself. One possibility is Sprint (NYSE:S), which will need to get more scale, though Dish Network (NASDAQ:DISH) also wants to break into the mobile market.
Competition: Being the No. 4 player in a market usually means there’s room for growth, but that’s not an attractive place to be when your industry is ruled by a virtual duopoly — in this case, Verizon (NYSE:VZ) and AT&T. Besides having tremendous resources and distribution, they also have the advantages of revenue streams from other businesses, such as cable and Internet access. This means they can create more competitive packages with bundling, which TMUS cannot. Meanwhile, the US mobile market is heavily saturated, which means growth will have to come from its competitors’ market share. T-Mobile’s best chance here is through lower prices.
No-Contract Prepaid Plans: MetroPCS has been a pioneer and leader in this category. The strategy is good at gaining market share in lower-income or youth market segments. But other operators have been catching on, such as LEAP Wireless (NASDAQ:LEAP), Sprint’s Boost Mobile and America Movil (NYSE:AMX), which is partnered with Verizon. So it likely will be tougher for TMUS to differentiate itself on the prepaid front.
Deal Risk: Transformative mergers aren’t a simple maneuver; it’s a complicated thing to integrate two operations and get a real sense for the cost opportunities at hand. And these distractions can give competitors an opportunity to capitalize. T-Mobile and MetroPCS’ specific challenge is the meshing of a German-controlled operation with a U.S.-based company, which could mean conflicts in culture.
CEO John Legere said in a press release: “Together, as America’s Un-carrier, we’ll continue our legacy of marketplace innovation by tearing up the old playbook and rewriting the rules of wireless to benefit consumers.”
It sounds great, but there’s little evidence to back that up. T-Mobile has not been much of an innovator, and in fact lost 2 million customers in 2012. In the face of shrinking subscribership, it has to deal with the complications of merging while fending off the rest of the entrenched telecom field.
So should you buy T-Mobile US? No — for now, the cons outweigh the pros.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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