T-Mobile and MetroPCS Agree to Merge

— October 03, 2012

Deutsche Telekom and MetroPCS Communications have signed a definitive agreement to combine the T-Mobile and MetroPCS brands. This is being done to deliver an enhanced customer experience through a wider selection of products and services, deeper network coverage and a technology path to one common LTE network. The combined company, which will retain the T-Mobile name, will have an expanded scale, spectrum and financial resources.
 
Deutsche Telekom’s supervisory board and the MetroPCS board of directors unanimously approved the transaction, which is structured as a recapitalization in which MetroPCS will declare a one-for-two reverse stock split, make a cash payment of $1.5 billion to its shareholders (approximately $4.09 per share) and acquire all of T-Mobile’s capital stock by issuing 74% of its common stock to Deutsche Telekom on a pro forma basis.

Deutsche Telekom has also agreed to roll its existing intercompany debt into new $15 billion senior unsecured notes, provide the company with a $500 million unsecured revolving credit facility and provide a $5.5 billion backstop commitment for certain MetroPCS third-party financing transactions.

Based on analyst consensus estimates for 2012, the company is expected to have approximately 42.5 million subscribers, $24.8 billion of revenue, $6.3 billion of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), $4.2 billion of capital expenditures and $2.1 billion of free cash flow, defined as EBITDA less capital expenditures, in 2012.
 
The transaction will have several benefits to the company and its customers, including:

  • Greater network coverage: Deeper LTE network deployment and a path to at least 20x20 MHz of 4G LTE in many areas. Existing MetroPCS customers will be migrated to a common LTE-based network as they upgrade their handsets
  • Increased scale: Will allow the company to secure more handsets, content and applications
  • Cost/revenue synergies: $6-7 billon of cost synergies and additional upside from revenue synergies
  • No-contract services: The company will continue to provide a contract-free option with its mobile offerings
  • A wider selection of mobile plans: Contract, no-contract monthly, SIM-only, pay-as-you-go and mobile broadband services
  • More customers served: MetroPCS plans and services will reach a larger number of new areas to complement T-Mobile’s offerings
  • A stronger network: Will advance the company’s business to business offerings and mobile virtual network operator (MVNO) platform
The transaction is also expected to enhance the company’s financial position. Highlights include:
  • Annual growth: Expected five-year compounded annual growth rates in the range of 3% to 5% for revenues, 7% to 10% for EBITDA and 15% to 20% for free cash flow
  • Improved profits: A targeted EBITDA margin in the range of 34% to 36% at the end of the five-year period and projected cost synergy realization, with an annual run-rate of $1.2-1.5 billion
  • Increased financial flexibility: Includes direct access to the debt and equity capital markets
John Legere, president and CEO of T-Mobile, believes that the move will be beneficial for all involved, including customers in the enterprise. “We will be a stronger competitor, providing customers with offerings such as unlimited nationwide 4G data and bring your own device plans. These features, along with our ability to react with greater speed and effectiveness to customer and market opportunities, will deliver value to our customers, business partners, employees and shareholders.”
 
Upon completion of the transaction, the company is expected to continue trading on the New York Stock Exchange. Legere will serve as president and CEO of the new company and J. Braxton Carter, currently CFO and vice chairman of MetroPCS, will be the CFO. The company will operate T-Mobile and MetroPCS as separate customer units, led by current T-Mobile COO Jim Alling and MetroPCS president and COO Thomas Keys, respectively.
 
After closing, the company’s headquarters will be in Bellevue, WA and it will retain a presence in Dallas, TX. The company will have an 11-member board of directors, including a number of members appointed by Deutsche Telekom consistent with its equity ownership.
 
The transaction is subject to MetroPCS shareholder approval, regulatory approvals and other closing conditions and is expected to close in the first half of 2013.

According to Bloomberg, shares of MetroPCS went up 18% on October 2 and the deal “leaves Sprint behind.” Earlier in the year, Sprint had planned to buy MetroPCS.

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