The imminent merger of communications firms T-Mobile USA and MetroPCS Communications Inc has generated quite a stir of interests among shareholders and analysts as Deutsche Telekom AG, the owner of T-Mobile USA is expected to sweeten the deal of the merger. Two people familiar with how Deutsche Telekom AG is looking at the merger said that the Germany-based company is trying to improve the terms.
It is known that the board of Deutsche Telekom AG is split whether to pad more cash into the deal to secure the approval of MetroPCS shareholders this coming April 12.
Another source who knows the thinking of MetroPCS regarding the merger said that the American company has one week left to decide wheteher or not to proceed. The source of Reuters did not want to be named because on-going talks are considered private.
Deutsche Telekom AG, on the other hand, released a statement late Thursday that there had been no changes to the original proposal because it was for the best interest for both companies.
The comment was a response to an earlier question whether Deutsche Telekom AG was trying to sweeten the deal. A company spokesman had initially replied: “No, we can flatly deny that.”
Shares of MetroPCS climbed 1.5 percent higher at $11.12 on the New York Stock Exchange last Thursday. The company chose to comment on the issue.
When asked about comments on the deal, Morgan Stanley and Lazard, Deutsche Telekom’s financial advisers, also chose to keep mum about it.
During an initial proposal for the merger last October, MetroPCS agreed to the deal although things changed after activist investors with 12 percent stake of the MetroPCS disagreed with the terms and started convincing others to contest the deal. Thus, Deutsche Telekom was forced to find ways to charm the shareholders of MetroPCS.
A couple of analysts from the US said that Deutsche Telekom will most likely sweeten the offer by modifying the capital structure to woo MetroPCS shareholders.
The primary concern of shareholders is effective management of debt reduction that the two companies will accumulate if the merger will push through. It is expected that both companies will tally a $21 billion mark in debt after the merger, and reducing this figure is of paramount importance for MetroPCS shareholders.
Analyst from New Street, Jonathan Chaplin, said: “They should just cut the debt by about $6 billion.” Another analyst from Macquarie, Kevin Smithen, said that reducing the debt by $3 to $4 billion will most likely secure the merger.
Chaplin believes that Deutsche Telekom is intent on pushing through the merger because it can give T-Mobile USA priceless airwaves in some significant markets, and can eventually save up to $7 billion for the company.
“There’s no alternative acquisition that’s likely to achieve these objectives,” said Chaplin.
The biggest shareholder in MetroPCS, Paulson & Co, said that it would refuse the offer from T-Mobile. Another big shareholder, P. Schoenfeld Asset Management (PSAM), expressed dissatisfaction over the proposed the deal and is now fighting a proxy battle with the aim of killing the merger.
Both shareholders raised the debt issue as their main concern. PSAM chief investment officer Doug Polley, said that “the biggest problem has been the capital structure and a considerable lack of transparency. Voting down the proposed deal, even without a revised offer from DT (Deutsche Telekom) or another buyer surfacing, still yields superior value to PCS shareholders.”
To add additional pressure for Deutsche Telekom, top recommendation advisory companies, Glass Lewis and ISS, are also siding with the rebel shareholders to vote against the deal.
But the second biggest shareholder, Madison Dearborn Partners, used its influence to push through with the deal and has garnered support from advisory firm Egan Jones.
In order to be successful, Deutsche Telekom only needs a simple majority of the shareholders.
The merger is an important one for Deutsche Telekom, who already failed to sell T-Mobile USA to AT&T in 2011. It needs to close the gap between T-Mobile’s rivals by beefing up its network with MetroPCS airwaves. A successful merger also means Deutsche Telekom can free up resources to invest in domestic market.
The original October deal offered MetroPCS shareholders a $4.06 per share in cash and a stock equivalent to 26 percent of the merged company. The rest would belong to Deutsche Telekom.
Following the merger, the combined companies would have 42.5 million subscribers and an estimated revenue of $24.8 billion.
Shares of the Bonn-based Deutsche Telekom increased up to 2 percent to 8.52 euros at the close of Thursday’s trading day.