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Stage set for MetroPCS showdown

by Scott Stuart  |  Published March 22, 2013 at 9:17 AM

Deutsche Telekom AG's T-Mobile USA Inc. and MetroPCS Communications Inc. said they are set to close the merger of their cell operations with upcoming shareholder approval, setting the stage for the final showdown between MetroPCS and P. Schoenfeld Asset Management LP over the merits of the deal.

MetroPCS said the last regulatory hurdle, approval from the Committee on Foreign Investment in the United States, was in hand Wednesday, March 20. The Federal Communications Commission cleared the deal earlier this month.

PSAM, which holds about 2.5% of MetroPCS, has been conducting a solicitation against the combination of T-Mobile into MetroPCS on the belief that the deal unfairly values MetroPCS and the company would be better off following a standalone path.

The MetroPCS shareholder vote on the transaction is April 12. The deal offers MetroPCS shareholders $4.08 in cash and half of a share of the combined company. In proxy materials, MetroPCS has said the value per share should equate to between about $16.50 and $18.80 per share. MetroPCS shares currently trade for $10.57 at a discount of about 55% to that value projection.

Both parties have actively courted shareholders this week; PSAM filed its white paper explaining its position against the deal and MetroPCS has filed its shareholder presentation.

On Thursday, PSAM followed up with a litany of questions that it believes MetroPCS should further address before shareholders are asked to weigh in on the reorganization. PSAM asks MetroPCS to explain why its share price has declined 23% since the deal announcement in October when the market has been up and why insiders have been sellers of MetroPCS shares. The hedge fund said that while the deal value was ramped down for MetroPCS shareholders during negotiations because MetroPCS's performance was weak, it has not been adjusted upward when MetroPCS performed better.

PSAM also raises questions about why a $1.5 billion of future spectrum purchases is deducted from its relative value in the combination. And the fund questions the cost of a $15 billion intra-company loan to Deutsche Telekom, which will hold 74% of the combined U.S. cellphone operations. PSAM's complaints about the deal or the disclosure explaining its rationale include numerous other questions.

MetroPCS has responded to some of PSAM's points in its own presentations and proxy materials.

The company said that leverage of the combined entity would be in line with peers. There is no comparable market for the debt raised from Deutsche Telekom but the terms were set through a market-based pricing mechanism, avoid fees and near-term maturities, MetroPCS said. If adjusted for the $1.5 billion in cash payment, the split of the combined entity would be less favorable to MetroPCS -- 17% to 24% rather than the 26% in the current terms and MetroPCS is valued at a premium to its likely standalone valuation, the company said.

More filings with the Securities and Exchange Commission are sure to follow. Paulson & Co., with 9.9% of MetroPCS, said in a March 1 13D filing with the SEC that it opposes the current deal. Paulson said the combination makes strategic sense, but due to excessive leverage and high interest rate on the intercompany debt, it will vote against it. Paulson did outline a path to gaining its support. The fund said a reduction of the new company's debt by $6.6 billion and a lowering of its interest rate of 4.2% would win its support. Paulson would also consider a combination of debt reduction, added cash and/or a higher exchange ratio for MetroPCS shareholders, according to the filing.

Macquarie Group Ltd. analyst Kevin Smithen in a report agreed that a reduction of the debt at the new entity would be preferable and a boost to DT's equity valuation. Macquarie said based on meetings with top shareholders there is a good chance the deal does not win support.The opinions of proxy advisers could end up having some weight on the shareholder vote.

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Tags: arbitrage | Deutsche Telekom | FCC | MetroPCS Communications | P. Schoenfeld Asset Management | T-Mobile USA

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Scott Stuart

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