Proxy Season Insider 2013/03/29: MetroPCS

MetroPCS (PCS) | NYSE | Meeting Date: 12/04/2013
At first glance, MetroPCS’ proposed combination with Deutsche Telekom’s T-Mobile appears to be a strategic win-win for the fourth and fifth largest U.S. wireless carriers, not to mention for consumers seeking a low-cost alternative to AT&T and Verizon. But a closer look, from MetroPCS shareholders’ perspective, reveals a questionable value proposition and a potentially unfair transfer of shareholder value.

The transaction structure is unique: a reverse merger combined with a recapitalization whereby the smaller MetroPCS would “acquire” T-Mobile, but in reality Deutsche Telekom would take control of MetroPCS and combine it with T-Mobile, thus achieving a public listing for the new company, which would keep the T-Mobile name. The dynamics can make it difficult for shareholders to assess the current value that they stand to receive in the tie-up.

In our review of the transaction, which also calls for a definitive cash payment to MetroPCS shareholders, we have concerns that MetroPCS’ resulting ownership may undervalue its contribution. The current deal appears to provide a small, if any, premium for what amounts to a takeover of MetroPCS. Alternatives to the deal have drawbacks as well. There’s always the risk that Deutsche Telekom may walk away if investors go against the deal.

Still, MetroPCS might elicit sweeter terms from the would-be buyer by holding out. If not, it may ultimately receive a better offer from another strategic partner down the road. In the meantime, MetroPCS could abide on its own as a profitable company with relatively bright, albeit capped, prospects.

Two prominent hedge funds, Paulson & Co. and P. Schoenfeld, together owning 12% of MetroPCS, oppose the deal because they believe it saddles the company with too much debt and doesn’t provide MetroPCS shareholders with a large enough equity stake. On the other side, the board and the company’s second-largest shareholders emphasize the strategic benefits of the combination, which we admit are compelling, and argue that the transaction implies a premium for MetroPCS shareholders.

The market doesn’t seem to think so, with MetroPCS’ stock price down as much as 31% since the public announcement of the deal. In our opinion, shareholder distaste for the current deal could be abated by Deutsche Telekom agreeing to a larger resulting ownership stake, increasing the cash payment or modifying the size or terms of the significant debt that it will hold in the new company.

In any case, the current situation and investor sentiment on both sides of the deal will make for an interesting outcome when MetroPCS’ shareholders vote on the deal on April 12, 2013.

Reuters: 3/29 “Glass Lewis said in a report released late Thursday that the proposed transaction undervalues MetroPCS’s contribution to the combined company, adding that it believes MetroPCS shareholders could likely realize additional value in the short term if the company remained independent.”