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The combination of MetroPCS (NYSE: TMUS ) and T-Mobile USA has passed every regulatory hurdle, leaving a shareholder vote as the last remaining roadblock. But that's not quite a slam dunk: Shareholder-interests defender Institutional Shareholder Services has teamed up with two major owners to scuttle the agreement at the last possible moment.
MetroPCS is very much in favor of the current T-Mobile deal. In a public letter to shareholders on Monday, the company defended the proposed agreement in no uncertain terms (emphasis theirs):
- If the proposed combination is not approved, MetroPCS' stockholders will not enjoy its compelling benefits -- many of which are only available by combining MetroPCS and T-Mobile.
- Do not reject this proposed combination -- do not take the risk of a loss of value for MetroPCS' stockholders.
The company argues that ISS based its critique on assumptions that are wildly different from MetroPCS' own. For example, MetroPCS has set $1.5 billion aside for spectrum license acquisitions. ISS believes that this reserve should add $1.5 billion to the value of MetroPCS, but T-Mobile and MetroPCS itself don't agree. "Wireless companies are valued as going concerns based upon EBITDA and cash flow, not asset value," the companies stated. "MetroPCS believes that, should it spend the $1.5 billion on spectrum, its equity valuation will not benefit from the value when adjusting from Enterprise to Equity Value (or value per share)."
In other words, MetroPCS shareholders should count themselves lucky to own 26% of the combined company. Some of the alternative deals proposed by activist shareholders might reduce the MetroPCS stake to as little as 12%.
In the end, it all comes down to financial hand-waving and a bit of "he said, she said." But both companies need this deal to happen, unless they enjoy eating Verizon 's (NYSE: VZ ) and AT&T 's (NYSE: T ) dust. The two giants dominate the American wireless landscape with roughly 100 million subscribers each. Even together, T-Mobile and MetroPCS only add up to 42 million customers. But their combined spectrum holdings will make T-Metro stronger than the sum of its parts.
This market could use another serious contender, and MetroPCS shareholders would still be silly to vote the deal down.
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