T-Mobile, MetroPCS: Form Up and Fight, or Sell
For at least a few decades, there have been a series of (mostly) Japanese-influenced animated and live-action TV series in which a team of heroes, each with a specific skill set, comes together to combat and triumph over something that cannot be overcome by any single member of the team. One classic such hero is the super-robot Voltron, Defender of the Universe, which is formed by a team of smaller robots/vehicles that, when joined, form a whole that is greater than the sum of its parts, and cannot be defeated by evil.
Now we have T-Mobile and MetroPCS. As of October 3, 2012, the two carriers have signed a definitive agreement to combine into what is being called by some “a leading value carrier” (i.e., second-tier provider) in the U.S. wireless marketplace. The combined company will retain the T-Mobile name, and claims in its release this morning to be able to deliver the “expanded scale, spectrum, and financial resources to aggressively compete with the other national U.S. wireless carriers.”
The deal has been approved by both Deutsche Telekom’s supervisory board and MetroPCS’ board of directors. We understand that the deal is structured as a recapitalization, including MetroPCS issuing a 1-for-2 reverse stock split and a cash payment of $1.5 billion to its shareholders, and swapping 75 percent of its common stock for T-Mobile capital stock. Key to the competitive ability of the combined firm are the deep pockets and commitment of Deutsche Telekom, which has agreed to hold $15 billion of debt in senior, unsecured notes of the combined company; to provide the combined company with a $500 million unsecured revolving credit facility; and to provide a $5.5 billion commitment for MetroPCS third-party financing deals.
Numbers from multiple sources this morning aggregate into the following financial US market snapshot for the combined T-Mobile in fiscal 2012: 42.5 million subscribers, $24.8 billion in annual revenue, $6.3 billion of adjusted EBITDA, $4.2 billion of capital expenditures, and $2.1 billion of free cash flow. I.e., a relatively solid financial footing.
Saugatuck has two quick takes on this:
First: Assuming regulatory approval, something like this deal had to happen in order for both carriers to remain viable and relevant. But even with the deep pockets of DT behind them, we don’t see the “new” T-Mobile rising to the occasion / ability of competing against wireless hegemony overlords Verizon and AT&T. There are just not enough pieces in this deal to form an effective, complete, Voltron-like “whole”; instead, they combine for about 10 to 12 percent of the overall US market. To combat the VZ+ATT overlords, a viable competitor will need at least 25 percent market share with the accompanying revenues, presence, channels, and overall ecosystem. There are still a few outlier wireless providers, but adding them to T-Mobile would grow only another couple of market share percentage points. And they will still lack the potentially rejuvenating power of iPhone / Apple.
In our view, T-Mobile is viable and competitive – but like an incomplete Voltron, unable to truly triumph. They can battle and survive, but not defeat the opposing powers. The parts need to add up to a greater whole. In other words, they need the rejuvenating power of the iPhone / Apple lifeline, and the old-line presence and power of Sprint, in order to form up into a truly competitive fighter in the existing, mismatched arena of US wireless markets.
The regulatory and technological challenges facing such a merger are more than significant. Given the years that any such effort would take, enterprise IT and network buyers and planners need not put any current plans on hold – which only preserves and extends the power of the two giants currently dominating the arena.
Second: The new T-Mobile could compete and win a few battles here and there, but it will need more than DT’s deep pockets to thrive and grow. It needs to form into something larger and more powerful before it can truly, effectively compete. For that reason, we look at the financial maneuverings of DT as described above, and believe that it increases the potential for DT to ultimately “package” and sell the soon to be expanded (and publically traded) T-Mobile, and remove itself from the capital-intensive and volume-dependent US wireless business. Should the market get ready for “SprinTMobile?”