T-Mobile Deal Cleared to Face MetroPCS Shareholders

The merger of T-Mobile and MetroPCS is now in the hands of MetroPCS shareholders, who don't all agree they're getting a fair shake.

The merger between T-Mobile USA and MetroPCS, the country's fourth- and fifth-largest carriers, respectively, is now in the hands of MetroPCS shareholders.

The Committee on Foreign Investment in the United States, the last regulatory body needed to approve the deal, has given it a green light, Bloomberg reported March 21, citing an emailed statement from the committee.

Over the last few weeks, the merger has additionally been approved by the Federal Communications Commission (FCC) and the Department of Justice. While those organizations moved rather swiftly—relative to their decision making around the proposed (and ultimately failed) merger between T-Mobile and AT&T in 2011—the shareholder vote, which is scheduled for April 12, may not proceed so smoothly.

Paulson and Co., the hedge fund of billionaire John Paulson and the largest single MetroPCS shareholder, as well as P. Schoenfeld Asset Management (PSAM), have come out against the deal.

PSAM filed a proxy statement with the U.S. Securities and Exchange Commission Feb. 28 for a special meeting of stockholders to be held April 12, urging fellow stockholders to vote against the deal.

Paulson has argued the new company created by the merger will have too much debt, and that the interest rate is too high on T-Mobile parent-company Deutsche Telekom's debt financing, creating too much equity risk for shareholders.

In a Feb. 28 letter to members of MetroPCS' Board of Directors and the Deutsche Telekom Supervisory Board, Paulson wrote that he also found the ownership split to be "highly unfavorable." Deutsche Telekom would hold 74 percent of the company to MetroPCS' 26 percent, even though MetroPCS "is contributing 42 percent to the pro forma company's value."

Moreover, he added, "In 2012, MetroPCS' [earnings] grew 14 percent, while T-Mobile's [earnings] declined 8 percent. MetroPCS shareholders are being short-changed on this deal. ... We believe MetroPCS will be worth more as a stand-alone company than it would be if it merges with T-Mobile."

Paulson acknowledged that he sees the "strategic merits" of the deal, but can't support them at the current terms.

"We would be supportive of a deal only if the deal terms were changed by reducing the intercompany debt and lowering the interest rate," Paulson wrote.

He proposed lowering the interest rate to 4.2 percent from 7 percent and reducing the new company's debt to $6.6 billion from $15 billion.

This "fair and prudent solution," wrote Paulson, would not only benefit MetroPCS and T-Mobile, but increase the economic return to MetroPCS shareholders, as well as to Deutsche Telekom.

Open to still further negotiation, Paulson concluded, "While we believe the aforementioned is the best alternative, we would also consider a combination of debt reduction, added cash and/or a higher exchange ratio for MetroPCS Shareholders."

The combined companies are expected to have a significant impact on the overall mobile market, in part through their ability to more aggressively pursue value-focused consumers.

Deutsche Telekom announced March 20 that the 11 members of the new company's supervisory board have been named. DT Chief Financial Officer Tim Höttges will serve as chairman and be joined by T-Mobile CEO John Legere, as well as representatives from MetroPCS, Blackstone and Harvard University.

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EDITOR'S NOTE: An earlier version of this article incorrectly stated the date of the MetroPCS shareholder meeting.The date is April 12.