The ongoing consolidation in the US telecom market is creating more and more opportunities. After failing to merge with AT&T Inc. (NYSE:T), Deutsche Telekom has been wooing MetroPCS Communications Inc (NYSE:PCS) for a merger with its US unit T-Mobile.
Following an initially cold response to the deal by MetroPCS Communications Inc (NYSE:PCS)’ shareholders, Deutsche Telekom has sweetened its offer for for the telecom play in a bid to fend off opposition. Deutsche Telekom also seeks to get a majority vote during MetroPCS’s next shareholders meeting, which has been postponed to April 24.
Deutsche Telekom merger with MetroPCS
The new deal promises to reduce the debt of the merged company from $15 billion to $11.2 billion, as well as lower the interest on shareholder loans by 0.5%.
As another measure to alleviate some of the concerns, Deutsche Telekom has now proposed a longer lock-up period of 18 months, compared to six months previously offered. The equity structure will remain the same, with Deutsche Telekom owning 74% of the new company compared to 26% for current MetroPCS Communications Inc (NYSE:PCS) shareholders.
Unlike the proposed deal with AT&T Inc. (NYSE:T), which was scuttled by the U.S. Department of Justice on antitrust grounds, Deutsche Telekom has received regulatory approvals for the deal with MetroPCS Communications Inc (NYSE:PCS). Deutsche Telekom’s offer had a positive effect on MetroPCS shares, which jumped 3.5% in early trade in recent sessions. There are no doubts about T-Mobile’s struggles, but a look at MetroPCS reveals it’s also not in a great position.
MetroPCS Communications Inc (NYSE:PCS) has an unfavorable capital structure, which is primed to sap much of its future earnings. As a result, its forward price-to- earnings ratio of 15 is greater than that of the trailing 12 months, not to mention it does not pay dividends as of now.
However, the MetroPCS deal with Deutsche Telekom promises to take care of much of these concerns. The combined entity promises to have greater spectrum-depth in the major urban areas so that it can provide better services. Deutsche Telekom’s T-Mobile unit has recently launched LTE service in seven locations and its value-oriented strategy, which coupled with MetroPCS’s experience in the prepaid market, will make a lot of sense for shareholders.
Sprint, Softbank and Clearwire merger
Meanwhile, MetroPCS stands to face strong competition from a re-energized Sprint Nextel Corporation (NYSE:S) after the latter company’s talks with with Softbank. Sprint Nextel Corporation (NYSE:S) will have deeper financial clout once its deal with Softbank is fully approved by regulators.
There is no clarity on the Sprint-Softbank merger yet, and now with the recent bid from DISH Network Corp. (NASDAQ:DISH) for Sprint, everything is up in the air. Analysts at JPMorgan Chase & Co. (NYSE:JPM) believe that there is a real possibility that Sprint will go for the DISH Network Corp. (NASDAQ:DISH) offer. However, regardless of the outcome in this bidding war, gains in Sprint’s stock will likely be difficult to come by.
The stock is already trading near 52-week high levels and has most positives factored into the price. And if Sprint’s deal with Softbank falls through, then its extremely high debt-to- equity ratio of 3.4 is enough to cripple its already-dilapidated financial situation. Unlike MetroPCS, Sprint has loss-generating operations.
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AT&T Inc. (NYSE:T) left all alone
On the other end of the market, AT&T Inc. (NYSE:T) has established a strong presence as a premium player. It has clear advantages over its rivals on LTE roll-out and uptakes, as well as monetization through share data plans.
AT&T Inc. (NYSE:T) recently announced the addition of 14 new markets to its growing LTE coverage, taking its total tally to 175 and boosting its population coverage to over 170 million. While this still leaves AT&T some way behind Verizon Communications Inc. (NYSE:VZ), which has already covered more than 270 million Americans with its 4G LTE network, the carrier has come a long way since the start of 2011 when it had less than half the current LTE coverage.
By the end of 2013, AT&T plans to reach 250 million Americans with its LTE network; so Verizon Communications Inc. (NYSE:VZ)’s big LTE lead shouldn’t be a concern to AT&T’s shareholders for long.
Shares have gained 12.5% over the last three months and trade at 52-high levels but still carry generally positive recommendations from brokerage houses.
AT&T is the leading player in the US telecom market, and as such commands a premium valuation as reflected in a current price-to-earnings ratio of 31.5. Considering its unique position in the market, the stock is still undervalued as also underlined by a forward price-to-earnings ratio of just 14.1. The company’s much sobered balanced sheet and a smart dividend yield of 4.7% are other factors which can attract more investors to the stock.
Foolish bottom line
Overall, the sweetened Deutsche Telecom deal for MetroPCS Communications paves the way for a long rally in its shares, while Sprint, despite emerging as a strong value-end buyout candidate, has largely shared its growth story with the market, and as such further gains look limited.
The article A Perfect Storm Brewing in the Telecom Market originally appeared on Fool.com and is written by Jacob Wolinsky.
