Deutsche Telekom’s hopes of getting backing from MetroPCS shareholders for its proposed reverse merger of T-Mobile USA and the value operator have suffered a blow after investor-advisory firm ISS recommended shareholders to vote against the deal. ISS…
Deutsche Telekom’s hopes of getting backing from MetroPCS shareholders for its proposed reverse merger of T-Mobile USA and the value operator have suffered a blow after investor-advisory firm ISS recommended shareholders to vote against the deal.
ISS said the transaction was not in the best interests of MetroPCS shareholders.
“In light of the negative market response to this transaction (shares are down 14.4% since announcement), the lower equity split than justified by the contribution of PCS to the combined entity, and the potential for PCS to continue to thrive as a stand-alone company, shareholders should vote against this transaction,” ISS said in the report.
ISS’ opinion is seen as particularly important for this deal due to the complex structure of the reverse merger.
ISS said that if MetroPCS remained independent, it could thrive and had enough money on its balance sheet to buy spectrum. ISS also added that the operator could well be the target of additional merger offers in the future.
P. Schoenfeld Asset Management (PSAM) – which holds 2% of MetroPCS – claimed the report as a victory in the wake of its vociferous criticism of the transaction. Alongside Paulson & Co – which holds 10% – it has been trying to convince the operator’s other shareholders that DT’s offer for the company is too low and that the terms are unfavourable.
Earlier this week T-Mobile USA CEO John Legere was quoted in local reports as saying the deal would be approved by MetroPCS shareholders, in spite of “greedy hedge funds that are trying to take a double-dip out of that process”.
But deal observers doubt the deal will receive the required votes from shareholders. New Street Research analyst Jonathan Chaplin said in a note to investors: “The ISS recommendation makes it highly unlikely that the deal will be approved as-is.”
Shareholders would want the merger to carry lower debt, have less onerous terms on the debt and some governance changes if they were to vote in favour of it.
“We don’t think DT can afford to walk away from the deal. In the unlikely event that they do, we don’t think PCS would remain independent for long – Sprint is a likely acquirer once they close their current slate of deals.”
Wells Fargo analyst Jennifer Fritzsche held a similar view. “T-Mobile is too far along the path to walk away from this deal,” she said. “We see a high likelihood of [T-Mobile USA] revising the terms, with lower leverage and possibly a higher price.”
Deutsche Telekom and MetroPCS agreed the reverse merger at the beginning of last October. The German incumbent would own 74% of the new business and would loan it US$15bn while MetroPCS shareholders would hold 26%, as the agreement stands now.
MetroPCS shareholders will vote on DT’s offer at an EGM on 12 April.
