September 27, 2012 10:15 pm

MetroPCS engages suitors, source says

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MetroPCS Communications (NYSE:PCS) is holding conversations with a number of strategic suitors to strike a deal for the wireless company, said a source familiar with the matter.

A potential MetroPCS deal is being viewed as a “first step” to support broader industry consolidation in the efforts to build a viable competitor to the two dominant wireless providers in the US market, AT&T (NYSE: T) and Verizon (NYSE: VZ), the source said.

MetroPCS’s conversations with some suitors are ongoing, while others were labeled by the source as being “off and on.” The companies participating in conversations with MetroPCS are Dish Networks (NASDAQ: DISH), T-Mobile USA and Sprint (NYSE: S), said the source.

Sprint and Dish declined to comment. MetroPCS did not respond to a request for comment. T-Mobile was not immediately available for comment.

Any deal for Richardson, Texas-based MetroPCS is expected to consist of stock and cash. The source cautioned that the conversations should not be labeled as negotiations at this stage and there is no assurance that a deal will be reached. “But the dance is definitely real,” he said.

Sprint may find an acquisition of T-Mobile the most attractive option, but there are concerns about the strength of Sprint’s and T-Mobile’s balance sheets, the source suggested. Both companies have a considerable amount of debt which is making striking a deal difficult. T-Mobile’s German owner is seeking access to a currency via a publicly traded vehicle, the source said.

MetroPCS has a healthy balance sheet and there are considerable synergies to be realized by all the suitors participating in the conversations, the source said. In a Sprint or T-Mobile deal, MetroPCS could help both companies delever more quickly. MetroPCS had USD 2.3bn in cash and equivalents and short-term investments as of 30 June.

A MetroPCS transaction with Dish, on the other hand, would give the satellite TV operator ownership of an up-and-running wireless network, the source said. Dish has been actively acquiring wireless spectrum, buying up the assets of Terrestar and DBSD North America.

Sprint and MetroPCS are “not fully engaged” in conversations, the source said. Sprint would have to show there is a level of commitment from Sprint’s board to complete a deal. In February, CNBC reported a merger was hours away from being announced, but the deal was shot down by Sprint’s board. The rejection occurred after months of work on the part of both companies, the report noted.

An industry banker said negotiations earlier in the year between Sprint and MetroPCS were held by very high level Sprint executives and MetroPCS. Most of the work was done before Sprint’s board was brought into the process. In the current round of conversations on industry consolidation, the board is familiar with Sprint’s participation in the conversations, this banker claimed.

Sprint continues to debate on how to value MetroPCS, the first banker said. A second banker said it’s hard to see why Sprint, which trades at around 4.9x EBITDA, would pay MetroPCS, which trades around 6.1x EBITDA, a premium if it’s balked at its price before. But the source said consumption of wireless spectrum by new and broader bandwidth wireless applications should not be underestimated and companies are going to need a lot of spectrum.

Both the second banker and source said Sprint’s investment in its “Network Vision” plan weighed on the board’s decision. Sprint’s share price also affected the decision. Sprint shares have climbed to USD 5.55 from a low of USD 2.12 at the beginning of the year, which could make Sprint’s board more amenable to a deal.

Suitors may be motivated to move now as Verizon and AT&T await clearer regulatory guidelines from the Federal Communications Commission (FCC) on the ownership of spectrum in a market, one regulatory lawyer said.

If suitors drag their feet, they may have more competition for these assets in 2013. AT&T CEO Randall Stephenson, at the GS Communacopia conference held in New York last week, said he is actively pushing the FCC to establish better guidelines to avoid the repeat of AT&T’s failed purchase of T-Mobile USA so that it can continue to increase its spectrum ownership.

Also at Communacopia Conference, MetroPCS CEO Roger Linquist said the company would do what is best for “our shareholders, partners and employees,” when asked about industry consolidation.


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