Deutsche Telekom AG is in talks to merge its T-Mobile USA Inc. unit with MetroPCS Communications Inc. and take a majority stake in the combined wireless service provider, the German company said Tuesday.
Deutsche Telekom, which has been looking for a way to bolster its customer-losing U.S. business, cautioned in a regulatory filing that the transaction was not a done deal because key issues had not yet been finalized.
The German company, which tried to exit the U.S. market last year but failed to complete a $39-billion (U.S.) T-Mobile USA sale to AT&T Inc. due to regulatory concerns, also said its board had not “taken the resolutions necessary for such a transaction.”
Deutsche Telekom did not discuss a potential deal structure in its statement.
But two sources familiar with the matter said that under terms of the deal being discussed, Deutsche Telekom would contribute its T-Mobile USA operations rather than paying cash. In return it would get a stake in MetroPCS, with the option to sell that on the stock market later.
The structure, known as a reverse initial public offering, involves a private company such as T-Mobile USA gaining a public listing by acquiring a public company, said the sources who asked not to be named as they are unauthorized to speak to the media. MetroPCS shares rose more than 17 per cent to $13.50 late Tuesday afternoon after Deutsche Telekom confirmed the talks. MetroPCS also confirmed the talks but said in a statement it did not “intend to comment further unless and until an agreement is reached.”
Some analysts worry that a MetroPCS/T-Mobile USA deal would be hugely complicated by their use of incompatible network technologies. They are both upgrading to the same high-speed technology but this process will take years, Roe Equity Research analyst Kevin Roe said. The U.S. market has been rife with speculation about the next round of consolidation here since AT&T’s proposed T-Mobile USA purchase failed due to regulatory opposition late last year.
A combined T-Mobile USA and MetroPCS would command 29.5 per cent of the market for prepaid wireless services that customers pay in advance and do not commit to long-term contracts, Bernstein analyst Craig Moffett said.
Shares of smaller rival Leap Wireless International Inc. shot up more than 8 per cent as investors bet that it could be the next acquisition target.
“Leap Wireless is now the belle of the ball,” Moffett said.
MetroPCS as well as rival Leap caters to cost-conscious customers but has been feeling the heat as bigger rivals such as Sprint enter their low-cost phone markets.
Shares in third-ranked Sprint Nextel Corp. fell 5.4 per cent after the news as many analysts had expected Sprint, which previously looked into buying MetroPCS, to end up buying MetroPCS, as both use the same network technology.
Sprint’s plan was vetoed by Sprint’s board at the last minute earlier this year.
Sprint has been struggling to find its footing for the last several years, and buying a company that is worth more than half its market value would have significantly strained its already stretched finances.
“A T-Mobile/PCS combination could make it more difficult for Sprint to merge with that combined entity longer term due to potential anti-trust complications,” said William Power, an analyst at Robert W. Baird & Co.
“That in turn could hinder Sprint’s ability to gain more scale to compete more effectively with AT&T and Verizon,” he added.
Deutsche Telekom has had little luck with its U.S. unit, which was once its cash cow but is now struggling to compete with much bigger rivals Verizon Communications Inc., AT&T and Sprint.
In the second-quarter, T-Mobile USA lost 205,000 customers in the United States and is expected to feel the pressure from the launch of the new iPhone, which it will not be selling in the United States.
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