Deutsche Telekom has improved its merger offer for MetroPCS in an attempt to appease the target’s shareholders. Activist investors have been lobbying Deutsche Telekom to sweeten the deal for months, arguing that the company’s offer was unfair to…
Deutsche Telekom has improved its merger offer for MetroPCS in an attempt to appease the target’s shareholders.
Activist investors have been lobbying Deutsche Telekom to sweeten the deal for months, arguing that the company’s offer was unfair to MetroPCS shareholders.
The German incumbent had proposed that the combined business of T-Mobile USA and MetroPCS carry US$15bn in debt, but it has reduced that figure by US$3.8bn to US$11.2bn in what it described as its “best and final offer”.
Deutsche Telekom also reduced the interest rate on the US$11.2bn debt by 50 basis points, and extended the lock-up period during which it is prohibited from selling shares in the combined entity from six months to 18 months.
However, Deutsche Telekom said that the ownership structure would remain unchanged meaning it would hold 74% of the merged entity and MetroPCS shareholders would own the remaining 26%.
MetroPCS was due to hold an EGM tomorrow, where shareholders would have voted on the T-Mobile USA deal. Influential proxy advisory firms Glass Lewis and ISS, as well as hedge funds Paulson & Co and P. Schoenfeld Asset Management (PSAM) – which together hold 12% of the target – recommended that investors in the Texan operator vote against the offer.
But in light of Deutsche Telekom’s revised offer, that meeting has been pushed back to 24 April.
Analysts had predicted that the German telco would improve its offer because it was too far down the line to risk the deal failing. The tie-up has already received the required regulatory approvals from the Committee on Foreign Investment in the United States, the Federal Communications Commission and the Department of Justice.
[subhead] Analysts: Deal likely to go through
The prevailing view amongst analysts is that the new terms would mean the reverse merger is now likely to be supported by MetroPCS shareholders.
“We expect the deal to be approved,” said Robin Bienenstock, senior analyst at Bernstein Research, in a note, adding that it would be good for both parties going forward.
“The company has been on the road meeting with investors over the last several weeks and should have a good sense of what would be required to get the deal approved,” said New Street Research’s Jonathan Chaplin in an email to investors who believed that the new terms would be enough to get the deal done.
Meanwhile, Wells Fargo senior analyst Jennifer Fritzsche said that by reducing the net debt, lowering the interest rate, and increasing the lock-up period, Deutsche Telekom has dealt with three “hot button” issues. “By our back of the envelope math, these new terms add north of US$3 in additional equity value for PCS shareholders (through the debt reduction and lower interest expense),” she said. “We believe this will be enough to gain shareholder approval.”
The deal, agreed last October, is structured as a recapitalisation in which MetroPCS will declare a 1 for 2 reverse stock split. MetroPCS shareholders will receive a US$1.5bn cash payment, equalling about US$4.09 per share prior to the reverse stock split.
MetroPCS will acquire all of T-Mobile’s capital stock by issuing 74% of MetroPCS’ common stock to Deutsche Telekom on a pro forma basis, and its shareholders will hold the remainder.
Deutsche Telekom estimates that the tie-up would generate cost synergies of US$6bn to US$7bn. The merged entity would position itself as the US’ leading value carrier.
Morgan Stanley is lead financial adviser to Deutsche Telekom. Lazard is also acting as financial adviser to Deutsche Telekom.
JP Morgan is lead financial advisor to MetroPCS and also advised MetroPCS with regard to post transaction capital structure. Credit Suisse and Evercore Partners are also acting as financial advisers to MetroPCS.
