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MetroPCS Communications Inc (PCS) Investors Express Concerns For T-Mobile Deal

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The US wireless industry is witnessing several consolidation efforts, as carriers try to join forces and resources to compete more effectively. The two deals, Softbank – Sprint Nextel Corporation (NYSE:S)– Clearwire Corporation (NASDAQ:CLWR) and T-Mobile – MetroPCS Communications Inc (NYSE:PCS), are the most talked-about agreements in the wireless space. Just as Sprint is facing opposition from Clearwire investors, who seem to be unhappy with the undervalued offer, T-Mobile is witnessing a similar issue with MetroPCS investors, who are dissatisfied with the terms.

Clearwire Corporation (NASDAQ:CLWR)

In October, parent company Deutsche Telekom proposed to combine T-Mobile with MetroPCS. It would gain a 74% ownership stake in the regional carrier, giving T-Mobile the required strength to attack larger rivals Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), and Sprint. As per the agreement, a reverse merger would take place, and MetroPCS would undergo a 1-for-2 reverse stock split and offer $1.5 billion to its shareholders. However, some shareholders are not in favor of the planned acquisition and wish to block the same. They believe that the prepaid wireless operator would be better off as an independent entity.

The troublemakers’ concerns “make a lot of sense”
P. Schoenfeld Asset Management
(PSAM) whose clients hold 8.3 million shares of MetroPCS, said that it filed proxy with the US Securities and Exchange Commission to seek votes from shareholders who oppose the proposed transaction. The owner of 2% of MetroPCS shares is encouraging investors to voice their opinion regarding the deal. PSAM soon found a friend in PCS’s biggest investor Paulson & Co, with 8.7% ownership, when the hedge fund expressed its concern regarding the prospects of the transaction.

The primary concern regards the total debt of the combined entity. Not only is the combined debt massive, but the interest rate is exorbitant, given the combined entity’s expected credit rating. This makes the combination a risky venture for PCS shareholders. The “exchange ratio” offered to the MetroPCS Communications Inc (NYSE:PCS) shareholders is too low to compensate for the risk they would undertake post-combination.

PSAM considers the offer unfair, and believes that it would not do justice to the shareholders. The investor has therefore decided to vote against the proposal unless conditions are modified. On the other hand, Paulson would make a final voting decision once it gets the “final merger proxy,” but it doesn’t find PSAM’s concern to be baseless; instead, it says PSAM’s reservations “make a lot of sense.”

Under the present circumstances, both PSAM and Paulson believe that staying as a standalone company and considering other attractive opportunities would be more rewarding for MetroPCS. Despite all this, Deutsche Telekom”remains committed” and is confident to close the deal by the middle of the year. The company says that the merger would prove fruitful for both T-Mobile and MetroPCS, as it would help them combine resources to make a stronger contender to battle larger players.

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