MetroPCS Merger in Further Danger

It looks like opponents of the proposed merger of MetroPCS (NYSE: TMUS  ) with Deutsche Telekom subsidiary T-Mobile USA got strong support on Wednesday, according to The New York Times.

Institutional Shareholder Services has agreed with Paulson & Co. and P. Schoenfeld Asset Management that voting for approval of the transaction would not be in the interest of MetroPCS shareholders.

Paulson has a 9.9% stake in MetroPCS, Schoenfeld 2%, and both funds believe the deal would incur too much debt for the newly formed company and would not give MetroPCS shareholders enough of a slice of the enterprise.

What may prove influential in the outcome of the voting is this from ISS: "The ultimate question for PCS holders, therefore, is whether this offer is sufficient compensation for putting control of their investment in the hands of another strategic, DT [Deutsche Telekom], under whose control T-Mobile has appeared to have so vastly underperformed."

P. Schoenfeld, which has been constantly filing proxies over the last several weeks urging shareholders to vote against the proposal, was thrilled with the ISS recommendation to turn down the deal.

"We are extremely pleased that ISS recognizes the Proposed Transaction between MetroPCS and T-Mobile (the "Combined Company") is not in the best interests of PCS shareholders ..." the fund said today in a statement.

P. Schoenfeld also quoted ISS as agreeing with merger opponents that MetroPCS would be better served staying as a stand-alone company, or possibly able to attract a better merger deal in the future: "Absent merging with T-Mobile, PCS will have enough cash on its balance sheet to dedicate to new spectrum and could continue operating as a stand-alone company. It may well, as many commentators have suggested, have additional M&A opportunities in the offing, given its attractive assets."

The ISS appraisal may take some of the swagger out of T-Mobile CEO John Legere's remark Tuesday that the merger would be "approved despite the greedy hedge funds that are trying to take a double-dip out of that process."

Paulson, in a statement released last night, took umbrage to Legere's characterization. The hedge fund "strenuously objects" to shareholders being called "greedy because they believe the current terms of the merger are poor for MetroPCS shareholders."

"If anyone is being greedy here, it is Deutsche Telekom ... It is not surprising that Deutsche Telekom is so eager to close this deal, as they get the lion's share of the benefits," Paulson continued.

Will the ISS analysis be the tipping point that ultimately undermines the deal -- at least as it is currently structured? That will be determined at the special MetroPCS shareholders' meeting on April 12.

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