What’s the Call on T-Mobile-Metro PCS?

by Brad Moon | October 4, 2012 9:19 am

The press release went out Wednesday morning[1], confirming recent speculation. German wireless giant Deutsche Telekom — which operates T-Mobile in the U.S. — and Texas-based MetroPCS (NYSE:PCS[2]) have announced they’re combining their U.S. operations under the T-Mobile name.

The respective corporate boards have approved the deal, in which MetroPCS declares a 1-for-2 reverse stock split, making a cash payment of $1.5 billion ($4.09 per share) to its shareholders, while Deutsche Telekom ends up with a 74% stake in the new company. Plans call for it to continue trading on the NYSE, with T-Mobile’s CEO assuming the reins as CEO of the new T-Mobile.

The two existing customer groups would continue to operate separately for now, but combined they would give the new T-Mobile 42.5 million subscribers, closing in on third-place Sprint (NYSE:S[3]), which claims over 56 million. According to T-Mobile, the move (which is still subject to regulatory approval) would create the “leading value-focused wireless carrier.”

Does this merger make any sense?

T-Mobile and MetroPCS operate incompatible networks (T-Mobile’s is HSPA+, while MetroPCS operates a CDMA network), so customers of one can’t simply gain access to both at the flip of a switch. MetroPCS customers will need new phones to use T-Mobile’s network. One way to predict how this might turn out is to look at how a similar move went for the competition.

Sprint bought Nextel — a competing carrier whose network was based on different technology — back in 2004 in a deal valued at $35.17 billion. Doing so accomplished several goals, including adding to Sprint’s available wireless spectrum and adding Nextel’s 15.3 million subscribers to make Sprint the third-biggest carrier in the country. Sounds good on paper, but Nextel customers have proved resistant to moving to phones that support Sprint’s network, requiring Sprint to maintain two sets of incompatible infrastructure.

It’s finally drawn a line in the sand, announcing that 5.4 million former Nextel customers will be cut off on June 30, 2013[4], when Sprint shuts down the Nextel network, finally making use of that spectrum to enhance its 4G network.

However, the deal has been costly to Sprint because Nextel customers have left (according to Forbes, to the tune of 690,000 subscribers per quarter[5], many  to competing carriers), and the company has lost money in each of the seven years since that deal closed. Bloomberg puts Sprint’s total losses[6] (including anticipated figures for the rest of this year and 2013) at over $50 billion.

Further complicating matters for T-Mobile/MetroPCS, these companies have a large emphasis on pre-paid customers, while Sprint and Nextel were focused on contract subscribers. It may be even more difficult to convince customers who bought their own phone to throw it away and buy a new one when they have no contract binding them to a service provider.

So, why would Deutsche Telecom attempt this? That question has two likely answers.

The first assumes that T-Mobile is serious about competing in the U.S. market. MetroPCS was the first carrier in the U.S. to deploy a LTE network, and the company has gained a reputation for being innovative and fast-moving. T-Mobile is likely banking on the fact that MetroPCS will be able to transition its subscribers to T-Mobile’s HSPA+ network relatively quickly, allowing for a quick shutdown of the CDMA network and re-use of that spectrum to enhance the new T-Mobile’s 4G LTE network.

CNET points out that this strategy would give T-Mobile the bandwidth[7] in key markets such as New York to operate a 4G network that’s faster and better-suited to the unlimited data plans the company still offers.

The second answer is perhaps a more cynical viewpoint that doubts Deutsche Telekom’s ultimate motives. Less than a year ago, the German parent company was trying to unload T-Mobile on AT&T (NYSE:T[8]) in a $39 billion deal that was ultimately stopped by the FCC[9]. There’s speculation that Deutsche Telekom is maneuvering to make its U.S. operation — which has lost 10% of its subscriber base in the past two years[10] and failed to land Apple’s iPhone smartphone as an option for subscribers — easier to sell.

Reuters says the new T-Mobile would both benefit Deutsche Telekom through higher U.S. stock valuations and provide a liquid asset[11] that’s more easily sold off if it decides to exit the U.S. market altogether.

Finally, should the other U.S. wireless carriers be worried about this merger?

Well, one that some people might see as being in the most danger — third-place, money-losing Sprint — might actually come out ahead. Forbes notes that once clear of the Nextel mess in 2013, Sprint may well be in a position[12] to take advantage of potential customer churn from T-Mobile/PCS conversions. It will no longer have the burden of maintaining a dual network and will be able to go on the offensive, finally leveraging that Nextel spectrum to boost its LTE network.

If former MetroPCS customer are forced into buying new smartphones, Sprint (with its carrier-subsidized iPhones) may suddenly be attractive, even though there’s a contract involved. Sprint’s shares took a hit on news of the deal, dropping 15%, although it has since regained half of that loss to reach $5.20. It’s still up nearly 190% over the year, as investors have ignored ongoing losses in anticipation of next year.

AT&T and Verizon (NYSE:VZ[13]), the country’s top two wireless carriers, are unlikely to sweat. T-Mobile and MetroPCS operated in the same markets, so it’s not like T-Mobile is gaining in terms of expansion of coverage. There may be some concern about pressure the new T-Mobile might be able to bring through unlimited LTE data in key markets. But like Sprint, AT&T and Verizon are more likely to be considering this a welcome opportunity to snag some new subscribers if the transition hits any snags.

As of this writing Brad Moon didn’t own any securities mentioned here.

  1. press release went out Wednesday morning: http://newsroom.t-mobile.com/articles/t-mobile-metropcs-combine
  2. PCS: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCS
  3. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  4. 5.4 million former Nextel customers will be cut off on June 30, 2013: http://finance.yahoo.com/news/sprint-shut-nextel-early-june-155343585.html
  5. to the tune of 690,000 subscribers per quarter: http://www.forbes.com/sites/terokuittinen/2012/10/02/out-of-the-blue-the-weirdness-of-the-t-mobile-metro-pcs-merger/
  6. Sprint’s total losses: http://www.bloomberg.com/news/2012-09-24/sprint-s-stock-outperforms-apple-as-ceo-sees-2014-profit.html
  7. would give T-Mobile the bandwidth: http://news.cnet.com/8301-1035_3-57525300-94/t-mobile-ceo-metropcs-deal-is-no-sprint-nextel-repeat/
  8. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  9. $39 billion deal that was ultimately stopped by the FCC: http://gigaom.com/2011/12/19/att-no-att-dropping-its-39b-t-mobile-bid/
  10. lost 10% of its subscriber base in the past two years: http://www.bloomberg.com/news/2012-10-03/t-mobile-would-still-rank-no-4-after-shotgun-wedding-.html
  11. provide a liquid asset: http://ca.reuters.com/article/technologyNews/idCABRE8920IY20121003
  12. Sprint may well be in a position: http://www.forbes.com/sites/terokuittinen/2012/10/02/out-of-the-blue-the-weirdness-of-the-t-mobile-metro-pcs-merger/
  13. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ

Source URL: https://investorplace.com/2012/10/whats-the-call-on-t-mobile-metro-pcs/
Short URL: http://invstplc.com/1fooPgx