T-Mobile USA’s attempt to consolidate with MetroPCS Communications Inc (NYSE:PCS) is yet again facing opposition as two leading proxy advisory firms suggested shareholders to vote against the deal. This is another blow to the national carrier’s endeavor to grow in the US wireless market. As per Bloomberg news both Institutional Shareholder Services (ISS) and Glass Lewis & Co. have advised MetroPCS Communications Inc (NYSE:PCS) shareholders to vote against the proposed merger. Such adverse opinion just two weeks before the shareholders’ vote on Apr. 12 is worrisome for the pending merger.
In response, the pay-as-you-go carrier said that it acknowledges the thorough study conducted by ISS, but the report possesses considerable mistakes that have led to such incorrect conclusion. Though the two advisory firms have criticized the combination and urged shareholders to disapprove the deal, another proxy firm Egan-Jones has recommended investors to vote for the transaction. Even the US regulators have showered their blessings and passed their prized approval. So now what is the issue?
The new knock
ISS replicates earlier investor critics,’ P. Schoenfeld Asset Management (PSAM) and Paulson & Co., opinion and says that the deal undervalues MetroPCS Communications Inc (NYSE:PCS). It also says that MetroPCS Communications Inc (NYSE:PCS) shareholders deserve 37% of the newly merged entity instead of 26% ownership, and that the deal terms are not in the best interests for MetroPCS Communications Inc (NYSE:PCS) shareholders. The success of the deal is doubtful unless T-Mobile USA adds some sugar to the proposal. Even San Francisco-based Glass Lewis echoes the same comment and says that the proposal ‘appears to undervalue MetroPCS Communications Inc (NYSE:PCS)’ contribution to the combined company.’
Unhappy investors have criticized the offer as being too stingy and have also expressed their concern with regards to the debt load of the combined entity. They have asked T-Mobile USA to add a sweetener to the deal or else they would prefer a fresh suitor. In case the regional carrier fails to find a potential buyer, these discontented investors would rather prefer a standalone company than agree to such a miserly offer.
So what if the deal falls through?
The alternative
PCS could think of pushing forward the shareholders vote unless it senses shareholders consent. However, it cannot push it beyond the first half of May as per the company’s bylaws. If the deal fails, then Deutsche Telekom might think of revising the conditions of the deal or start afresh to find a new consolidating partner. But both the options would require good investment of time all over again, which could cost the national carrier a lot as it aims to compete with larger rivals Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T) and Sprint Nextel Corporation (NYSE:S) who are way ahead in the LTE race.
If the PCS deal doesn’t materialize, the fourth largest US carrier would have to shortlist candidates from a pool which is barely left with suitable choices. Last year Sprint and T-Mobile USA were said to be in merger talks before the former was proposed by Japan based Softbank Corp (USA) (PINK:SFTBF). Now even Sprint is rigorously planning its way to become a stronger contender in the telecom space. Other than the Softbank deal, the Kansas carrier has also made a proposal to acquire the rest of Clearwire Corporation (NASDAQ:CLWR) in which it already holds a majority stake. Under the present circumstances, it would be better for T-Mobile to improve the deal terms that would appease PCS shareholders. While for PCS, if the T-Mobile USA deal doesn’t happen, finding a new suitor might get tough.
Working hard to emerge stronger
The acquisition of PCS is becoming critical for T-Mobile USA‘s success and chances are decent that Deutsche Telekom might increase the bid in case the deal doesn’t pass the shareholders’ test.
The Bonn-based company is undertaking steps to turnaround its struggling fate so that it emerges as a sustainable and stronger entity and contends in the competitive market. Deutsche Telekom tried to do so by selling the ailing entity to AT&T for mutual synergies, but the deal was criticized and ultimately fell through in the regulators examination.
Early last week, the company took a major step in offering the Apple Inc. (NASDAQ:AAPL) iPhone for the first time. The iPhone is slated to come on T-Mobile’s network on Apr. 12. John Legere, Chief Executive of T-Mobile also boasted to be the only carrier which would offer iPhones that would support HD Voice callings. Legere perceives this to be the start of a long term relationship with the Cupertino tech giant. Pointing out the benefits of buying Apple’s phone on T-Mobile’s network over AT&T’s, he said that the iPhone would get 50% higher bandwidth than on AT&T’s network. This is possible as the smartphone would run on the carrier’s three layer network. In addition to this, customers would also save $1,000 over the two year period if they bought it from T-Mobile rather than entering into a two year contract with AT&T.
To sum up
The new no contract service plan and the fresh association with Apple is all on the assumption that the company would acquire more spectrum from its pending acquisition of PCS. The entire strategy is built on the supposition that PCS’s takeover would strengthen the newly merged company’s assets and accelerate the process of deploying a robust wireless network.
Perhaps bringing down the total debt of the company could be a sensible idea to win over PCS investors’ confidence. It would be better for PCS as well, since the regional carrier would get the required exposure and recognition in the best US markets. Also, getting a fresh suitor looks difficult as options have reduced. There were no counterbids for PCS after T-Mobile made an acquisition proposal. Will T-Mobile add flavor to convince PCS investors? What remains to be seen is even after getting the regulators’ approval, will T-Mobile’s endeavor to combine with another carrier fail another time?
The article Will T-Mobile Sweeten Its Deal to Convince MetroPCS Investors? originally appeared on Fool.com is written by Rajesh Marwah.
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