Wednesday, October 3, 2012

T-Mobile's exit strategy

Since having its $39b sale of T-Mobile USA to AT&T nixed on antitrust grounds, Deutsche Telekom AG has been trying to figure out another way to exit the US market.

Today DT announced that its US subsidiary (#4 with 33.2 million subs) will be merged with the #5 US carrier, MetroPCS (with 9.3 million subs). The press release is here and the story is covered by Fierce Wireless (among many others)

It’s being called a “merger” but it’s clearly an acquisition (structured as a recapitalization), since T-Mobile USA will retain its name, technology, HQ and CEO — while MetroPCS will lose all four. It will retain its NYSE stock listing but presumably not its PCS ticker.

Although the cash payout is only $1.5b — funded by a $2.4b sale/leaseback of T-Mobile USA towers — MetroPCS shareholders will own 26% share of the new company. I haven’t seen any estimate of the value of the acquisition. The market suggests that the cash only accounts for one third of the value: today MetroPCS has a market cap (on inter-day trading) of about $4.5b, vs. $4.2b yesterday and $3.5b a month ago.

So instead of being paid $39b to exit, DT is paying $1.5b cash to build up a more stable company. I would presume that DT hopes that it will be able to gradually unload its 74% holding in the combined company through open market sales.

The two companies will be run as separate operations until T-Mobile can get all MetroPCS customers to phase out their CDMA handsets in favor of GSM ones. At today’s press conference, T-Mobile said it hopes to pull the plug on the MetroPCS network by the end of 2015. In the meantime, T-Mobile gets cheap LTE spectrum that both types of customers can share as the CDMA voice footprint goes down and the GSM voice footprint goes up. Or perhaps both end up on VoIP, i.e. VoLTE) which MetroPCS announced it plans to introduce in 14 US markets by early next year.

The acquisition puts pressure on #3 Sprint (56.4 million subs), which was a more obvious buyer for MetroPCS (which would have avoided the disastrous technology incompatibilities of its Nextel purchase). But so far, Sprint shareholders seem not to have reacted (either way) to the news.

One thing I haven’t seen mentioned: this is the merger of the iPhone outsiders: the #1, #2 and #3 carriers have the iPhone but #4 and #5 do not. Perhaps this will make Sprint want to buy the #6 carrier (which does have the iPhone): San Diego’s Leap Wireless which has 5.9m subscribers on its Cricket network.

However, the two hitches are technology and pride. Sprint is migrating its 4G strategy from WiMax to LTE, while Cricket uses TD-LTE, the Chinese variant not used by the top 5 carriers. (However, Cricket only offers LTE service in Tuscon right now, so perhaps it could drop the incompatible LTE if its acquired soon).

The other problem is that Leap turned down acquisition efforts by MetroPCS since 2007. Perhaps its due to bad blood between the companies that wouldn’t apply to Sprint, or perhaps Leap will realize that it lacks scale to operate its own network indefinitely in an ever-commoditized market.

No comments: