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Investors anticipate higher MetroPCS offer

by Chris Nolter  |  Published April 1, 2013 at 9:30 AM
Shares of MetroPCS Communications Inc. rose nearly 4% Thursday, March 28, after Institutional Shareholder Services Inc. recommended that investors vote against a merger with T-Mobile USA Inc.

The stock gained 39 cents, to $10.92, just days after T-Mobile USA chief executive John Legere suggested that MetroPCS shares would drop if the deal were scuttled.

The transaction would pay MetroPCS investors $4.08 in cash and give them, collectively, 26% of the equity in the combined company. The new telecom would have more than $20 billion in debt, including a $15 billion note provided by T-Mobile USA parent Deutsche Telekom AG.

"[MetroPCS] shareholders must compare what they will receive in the transaction -- approximately $4 in cash per share and retention of 26% ownership in the combined company -- to what [MetroPCS] shareholders will give up -- control, and considerable balance sheet flexibility," ISS stated in its Wednesday report.

Deutsche Telekom would have control of the company's board, balance sheet and strategic direction.

"The ultimate question for [MetroPCS] holders, therefore, is whether this offer is sufficient compensation for putting control of their investment in the hands of another strategic, [Deutsche Telekom], under whose control T-Mobile has appeared to have so vastly underperformed," ISS continued.

MetroPCS responded Thursday that "ISS's report contains material flaws and reaches the wrong conclusion," and maintained that the deal would produce savings and other benefits worth $6 billion to $7 billion. The telecom noted that Egan-Jones Ratings Co. recommended voting in favor of the merger.

P. Schoenfeld Asset Management LP, with about a 2.5% stake, and Paulson & Co., holding nearly 10%, have objected to terms of the merger and the debt associated with the deal. P. Schoenfeld urged MetroPCS to move the shareholder vote from April 12 to late June.

The recommendation from ISS could hold sway with stock index funds, suggested Jennifer Fritzsche of Wells Fargo Securities LLC in a note. "In our view, TMobile is too far along the path to walk away from this deal," Fritzsche wrote.

Legere unveiled plans to offer the iPhone in a Monday presentation. Fritzsche suggested that T-Mobile has based its plans on having a stronger portfolio of spectrum following the merger with MetroPCS.

"We do not see [T-Mobile USA] walking away from this deal and, in some way, view little downside to voting against the deal, as we see a high likelihood of [T-Mobile USA] revising the terms (with lower leverage and possibly higher price)," Fritzsche added.

A T-Mobile USA representative could not immediately be reached for comment.

Tags: Deutsche Telekom | Institutional Shareholder Services | MetroPCS Communications | P. Schoenfeld Asset Management | Paulson & Co. | T-Mobile USA

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