Responding to stiff criticism from MetroPCS shareholders and other observers, Deutsche Telekom sweetened its proposal to merge its T-Mobile unit with MetroPCS, a deal we previously discussed. Most of the deal terms remain the same. MetroPCS shareholders still will receive an immediate cash payment of $1.5 billion, or $4.06 per share, and will be left with the same 26% ownership stake in the combined company.
While leaving those key terms unchanged, Deutsche Telekom found a more subtle way to increase the value of its offer. It reduced the amount of debt it will hold in the combined company by $3.8 billion and lowered the interest rate it will charge T-Mobile/MetroPCS on that debt by 50 basis points. Implicitly, the debt reduction and interest rate deduction have the effect of increasing value for MetroPCS shareholders without actually increasing their percentage equity stake.
That’s because, as equity shareholders of the new company, current MetroPCS shareholders will now own a greater proportion of the new company’s total enterprise value (equity plus net debt). In a sense, they’ll now receive the same slice of a greater equity pie. The realigned capital structure also figures to be more manageable and flexible, making the combined company more competitive versus peers. Combined with the cost and cash savings from the lower interest rate, that equity slice should also garner a higher valuation from the market.
Hence, MetroPCS shareholders stand to realize greater value under the new deal terms from their implicitly larger and more valuable equity stake in the combined company. While MetroPCS shareholders probably would have preferred to get more cash or a larger ownership stake, the revised terms appear to have squelched prior opposition to the merger. Both Paulson & Co. and P. Schoenfeld, two large MetroPCS shareholders who planned to vote against the original deal, reversed course and indicated they now each support the merger under the revised terms.
Another factor that may have helped turn the tide in favor of the T-Mobile/MetroPCS tie-up is the M&A activity in the wireless-telecom industry. Just this week, Dish Network threw its hat into the ring by making a bid for Sprint, which already had a deal in place with Japan’s Softbank. Both Dish and Sprint were previously potential suitors for MetroPCS and remained possible alternate partners if a combination with T-Mobile collapsed. But as the industry landscape takes shape, it seems every player wants to find a dance partner before the music stops.
Given the more attractive value proposition of the revised T-Mobile/MetroPCS deal terms, a combination that remains strategically compelling, it seems a more assured outcome can be expected at MetroPCS’ rescheduled shareholder vote to approve the merger on April 24, 2013.