Blocked Merger: Another Opportunity for Sprint Nextel Corporation (S) and DISH Network Corp. (DISH)?

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As some stakeholders continue to show their dissatisfaction with the T-Mobile USA, Inc. and MetroPCS Communications In(NYSE:PCS) merger, the latter pushed forward the date for the shareholders’ vote. The date for the special meeting has been rescheduled from March 28 to April 12, where shareholders would discuss matter concerned to the proposed merger.

Sprint Nextel Corporation (NYSE:S)The largest investor of MetroPCS, Paulson & Co, publicly expressed its agitation regarding the deal and said that it would vote against the transaction, unless T-Mobile sweetens its offer. In addition, P. Schoenfeld Asset Management LP, which owns 2.3% of MetroPCS, has asked the two parties to update the merger documents with the latest regulatory filings of both the carriers before the vote.

Facing the pressure, the Richardson-based telecom provider moved the meeting date forward, hoping that it would give some more time to investors to evaluate and consider the benefits that the merger would bring to the combined entity.

The smallest of the national carriers, T-Mobile, is witnessing difficulties in fighting the stronger established players Verizon and AT&T. The combination with MetroPCS would give it the required strength to improve its struggling competitive position. The FCC also doesn’t seem to have any issue with the proposed merger, as it is rather encouraging telecom operators to grow stronger to combat the virtual duopoly of Verizon and AT&T.

But MetroPCS shareholders aren’t confident about the pending combination.

The issues raised

John Paulson, Hedge Fund manager of Paulson & Co., which has 9.9% stake in the company, is worried about the huge debt that would burden the company and lower its competitive position in the wireless market. T-Mobile’s total debt amounts to $15 billion, and this would lead to an aggregate debt of $23.2 billion for the combined company, which is enormous.

Paulson says that the consideration that the Richardson-based carrier is receiving to assume the $15 billion debt is insufficient. Further, considering the higher interest rates on the debt, and the impact of the added debt on MetroPCS’s share price, T-Mobile’s offer is lowering the value and not rightly compensating the carrier.

The debt to earnings ratio of the entity post merger would be as high as 3.6 compared to Sprint Nextel Corporation (NYSE:S)’s 1.5 post Softbank merger, Verizon’s 1.6, and AT&T’s 1.4. The new debt taken by Deutsche Telekom AG (ADR) (PINK:DTEGY) carries an exorbitant interest rate of 7%, while fellow rivals bear lower interest expense. Verizon’s cost of finance is 2.7%, AT&T’s interest rate is 2.1%, while Sprint Nextel Corporation (NYSE:S)’s is 4.2%.

Paulson says that he would back the merger only if the debt load is reduced by $6.6 billion, and the cost of finance of the fresh debt is lowered to 4.2%. The next option for T-Mobile is to raise the deal price for MetroPCS and win Paulson’s favor. P. Schoenfeld Asset Management has also shown similar concerns with respect to the deal.

In case the deal falls through, what would happen to MetroPCS?

Other suitors

There are high chances that both DISH Network Corp. (NASDAQ:DISH) and Sprint Nextel Corporation (NYSE:S) would grab the opportunity to bid for MetroPCS. Both Sprint and DISH Network Corp. (NASDAQ:DISH) are vying for Clearwire (NASDAQ:CLWR) . However, similar to MetroPCS investors, even Clearwire investors are extremely disappointed with Sprint’s $2.97 a share offer, which undervalues the company’s most prized possession.

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