Will This Merged Carrier Undercut the Wireless Industry?

While the proposed merger between MetroPCS (NYSE:PCS) and Deutsche Telekom’s (DTEGY.PK) T-Mobile was on shaky legs for a while, MetroPCS shareholders approved a sweetened deal Wednesday, giving the German wireless carrier the opportunity to improve its business in the United States.

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Wednesday’s ballot removed the final hurdle standing in the way of the combination of the fourth- and fifth-largest carriers in the United States, read a statement issued by Deutsche Telekom, with the transaction slated to be completed by May 1. In early March, the deal received the much needed approval of the Justice Department and the Federal Communications Commission, without which the merger would have been relegated to the same dust heap as 2011’s attempted partnership between AT&T (NYSE:T) and T-Mobile.

While both government agencies signed off on the deal — despite the increasing competitive nature of the wireless industry — MetroPCS shareholders were not so sure that consolidation was the right move for the company to make. The deal was tough sell; the reverse stock split — which will reduce the number of issued shares in return for a proportional increase in the share price — will enable MetroPCS to effectively swallow its larger rival, but it will also result in Deutsche Telekom shareholders owning 74 percent of the combined company…

MetroPCS stressed that the economic terms were “compelling” in a letter sent to its shareholder last month, but shareholders — including the company’s largest, hedge fund Paulson & Co. — argued that the resulting debt the wireless carrier would be saddled with would prevent it from effectively competing with its rivals.

So on April 10, caving into pressure, Deutsche Telekom lowered the size and interest rate of its loan to MetroPCS. With the shareholder loan cut to $11.2 billion from $15 billion, the deal left Deutsche Telekom still in possession of a 74 percent stake in the merged company and MetroPCS shareholders with a $1.5 billion cash payment.

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The merger will bring a much-needed 9-million-strong customer base to T-Mobile, which has had difficulties with subscriber retention in the past, as well as additional wireless spectrum needed to provide customers with faster data services. Without faster data services, the company would increasingly be unable compete with market leaders AT&T and Verizon (NYSE:VZ).

The rapidly growing smartphone market in the United States has created a massive hunger for data, and this ravenousness has made wireless service providers, in turn, need to scoop up more and more spectrum to support customers’ increased bandwidth use. The pace of consolidation has grown increasingly recently; last week, Dish Network (NASDAQ:DISH) offered $25.5 billion for Sprint (NYSE:S), the third-largest U.S. carrier.

“It’s good news, because you could never really be certain until the last moment,” Oddo & Cie analyst Alexandre Latrides told Bloomberg. “It’s one step, but it’s not enough.”

Between 2009 and 2012, T-Mobile lost 13 percent of its contract customers as it fell behind its rivals in constructing faster networks and offering Apple’s (NASDAQ:AAPL) iPhone. Now that Chief Executive Officer John Legere has secured a partnership with Apple and begun offering the device, the company will have to prove that its “uncarrier” strategy of stopping long-term contracts can win back subscribers. Combining the two lower-cost wireless carriers will help the merged company undercut the industry’ standard way of doing business, the CEO told Bloomberg, thereby supporting his plan.

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This boost appealed to shareholders. “We voted for it because we were happy to see that Deutsche Telekom realized the value contribution MetroPCS made to the combined companies,” Westchester Capital’s Merger Fund co-manager Roy Behren told the publication. “We look forward to having another strong competitor in the wireless industry.”

The enlarged T-Mobile USA will be exchange-listed.

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