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Shareholder opposes MetroPCS merger

by Chris Nolter | Published April 5, 2013 at 9:30 AM

With a little more than a week until the shareholder vote on the proposed merger of MetroPCS Communications Inc. and Deutsche Bank AG's T-Mobile USA Inc., hedge fund manager Peter Schoenfeld gave a harsh critique of the transaction on a Thursday call with investors.

Schoenfeld and executives at P. Schoenfeld Asset Management LP argued that the financing and equity split are flawed, and suggested that MetroPCS would be better off by itself.

"Standalone does not mean standstill," said Richard Bilotti, head of P. Schoenfeld's special situations research group.

P. Schoenfeld pointed to the company's cash on its balance sheet, a portfolio of spectrum it acquired for $3.7 billion, net operating losses that can be applied to future tax bills and the potential for wireless broadband growth as positive factors for MetroPCS going forward.

"We believe that stand alone risk is significantly mitigated by spectrum values," Bilotti said.

Since the October 2012 deal announcement, MetroPCS has reiterated that the combination with T-Mobile USA would bring $6 billion to $7 billion in savings and other benefits. The Richardson, Texas, telecom has said its credit rating would improve following the deal, and that there may not be a better takeout offer.

T-Mobile USA's roughly $7 billion rollup of MetroPCS would pay MetroPCS shareholders $1.5 billion in cash, or $4.06 per share. MetroPCS investors would hold 26% of the equity of the postmerger company.

P. Schoenfeld holds about 2.5% of MetroPCS's stock. Paulson & Co., with a nearly 10% position, also objected to the deal.

The combined T-Mobile USA-MetroPCS would have $20.5 billion in debt. Of that, $15 billion comes in notes from Deutsche Telekom that have drawn the ire of P. Schoenfeld. MetroPCS has noted that other financing is not available. It is either the Deutsche Telekom notes or nothing, according to the company.

P. Schoenfeld argued that the Deutsche Telekom notes should be reduced by $4 billion, to $11 billion, which the firm said would lower leverage from 3.6 times Ebitda to a multiple of 3 times.

The debt package that the merger partners propose would put the combined telecoms' Ebitda minus capital expenditures at 0.8 times interest expense, which P. Schoenfeld portfolio manager Douglas Polley said would give the company "no room for error."

Reducing the notes by $4 billion and lowering the interest rate would provide $500 million in savings that could be applied to marketing, research and development, or capital investments, P. Schoenfeld argued.

MetroPCS said in one of its letters to shareholders that if Deutsche Telekom agreed to take $4 billion less in notes, it would want more equity, thereby reducing the proportionate ownership of MetroPCS shareholders. The idea is that there is an enterprise value ascribed to T-Mobile and if you decrease the debt that Deutsche Telekom gets, you will have to increase Deutsche Telekom's equity, diluting Metro holders.

P. Schoenfeld maintains that MetroPCS deserves a control premium that would give the carriers' investors 31% of the combined companies.

Polley described the notes' call protections as "another insidious feature."

Refinancing the Deutsche Telekom notes before the call period expires, P. Schoenfeld said, would cost $4.6 billion. That comes to more than 3 times the cash payout to MetroPCS shareholders. The protections would limit the telecoms' ability to refinance and would deter suitors.

"It is a giant poison pill," Polley said.

The MetroPCS shareholder meeting is set for April 12.

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Shareholder opposes MetroPCS merger

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