Improving its network and a rebranding effort were part of T-Mobile USA's strategy to get back on track after regulators shot down the proposed AT&T merger. The next step appears to be yet another proposed merger, this time with prepaid carrier MetroPCS.
Deutsche Telekom on Wednesday confirmed an agreement to combine T-Mobile and MetroPCS.
The transaction 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 prior to the reverse stock split) and acquire all of T-Mobile’s capital stock by issuing 74 percent of MetroPCS’ common stock to Deutsche Telekom.
To be sure, the biggest concern about a possible merger between the two companies is their existing network technologies. MetroPCS currently operates a CDMA network, while T-Mobile’s network is GSM.
In a call with media and analysts, newly minted T-Mobile CEO John Legere stressed that the plan is not to mash together the two networks, but rather to quickly migrate customers to a single HSPA+/LTE-based network and then refarm MetroPCS’ CDMA spectrum.
“We don’t want there to be any confusion. At the date the deal closes, we will have an array of GSM, HSPA+ and LTE devices available for MetroPCS customers to purchase,” Legere said, noting that the company realizes in the end it may also need to provide some incentive to drive those final CDMA MetroPCS customers over to T-Mobile’s network.
Comparisons to Sprint’s disastrous acquisition of Nextel were inevitable, as Sprint is only now moving customers of Nextel’s iDEN network and refarming that spectrum for LTE. Legere said he’s glad to address concerns that this deal bares any similarity to Sprint’s past folly.
“I actually love the Sprint Nextel analogy, because it’s a great opportunity for us to explain what this is not,” Legere said.
Neville Ray, T-Mobile’s chief technology officer, said he’s not concerned at all about having enough spectrum to compete with on the LTE front with larger competitors like AT&T and Verizon Wireless.
“We will have a very large volume of AWS spectrum for LTE, second to none,” Ray said.
The merger will shake up executive ranks at both companies. Legere, currently president and CEO of T-Mobile, 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 Jim Alling, currently COO of T-Mobile, and Tom Keys, currently president and COO of MetroPCS, respectively.
After closing, the company’s headquarters will be in Bellevue, Wash. and it will retain a significant presence in Dallas. The combined company will have an 11-member board of directors, including a number of members appointed by Deutsche Telekom consistent with its equity ownership.
MetroPCS and T-Mobile will now await regulatory approval of the deal, which they expect to have by the first half of 2013.
The announcement comes just days after the FCC said  it was tossing out its current case-by-case approach for mergers and auctions to make its review process more concise. The commission said it is considering alternatives that among other things would cap the amount of spectrum a single company can hold.
The merger will create what both entities hope will be a stronger competitor. Based on analyst estimates for 2012 furnished by Deutsche Telekom, the combined company is expected to have approximately 42.5 million subscribers, $24.8 billion of revenue and $2.1 billion of free cash flow (defined as EBITDA less capital expenditures) in 2012.
Shares of MetroPCS shot up to over $14 after a Bloomberg published an unconfirmed report of the deal yesterday, but investors cooled on the merger immediately following today’s call. Since then, shares of the MetroPCS had fallen over 8 percent off yesterday’s closing price to $12.46 in early trading.
T-Mobile USA's strategy to get back on track after regulators shot down the proposed AT&T merger. The next step appears to be yet another proposed merger, this time with prepaid carrier MetroPCS. Deutsche Telekom on Wednesday confirmed an agreement to combine T-Mobile and MetroPCS.