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T-Mobile's Acquisition of MetroPCS a 'Great Strategic Fit'

T-Mobile
October 3, 2012 11:39AM

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By increasing scale with the T-Mobile acquisition of MetroPCS, Deutsche Telekom is betting it can attract more compelling handsets, content and applications. T-Mobile is projecting $6 billion to $7 billion worth of cost synergies and more upside from revenue synergies. T-Mobile also expects to offer more competitively priced plans.

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The AT&T merger didn't pan out, but T-Mobile isn't giving up on M&A as a growth strategy. Deutsche Telekom, the parent company of T-Mobile, is now looking to cozy up with MetroPCS in a $1.5 billion acquisition. The transaction is expected to close in the first half of 2013.

Deutsche Telekom has agreed to combine T-Mobile and MetroPCS in a move to create the leading value carrier in the U.S. wireless market. The merger will allow T-Mobile to offer a wider selection of products and services, deeper network coverage and a technology path to a common LTE network. The combined company will keep the T-Mobile name.

"The T-Mobile and MetroPCS brands are a great strategic fit -- both operationally and culturally," said Rene Obermann, CEO of Deutsche Telekom. "We are committed to creating a sustainable and financially viable national challenger in the U.S., and we believe this combination helps us deliver on that commitment."

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Deutsche Telekom said the combined company will be a stronger competitor and will be well-positioned to drive future growth. Based on analyst consensus estimates for 2012, the new T-Mobile is expected to have approximately 42.5 million subscribers, $24.8 billion of revenue, $6.3 billion of adjusted earnings before interest, taxes, depreciation, and amortization, $4.2 billion of capital expenditures and $2.1 billion of free cash flow in 2012.

By increasing scale, Deutsche Telekom is betting it can attract more compelling handsets, content and applications. The firm is projecting $6 billion to $7 billion worth of cost synergies and more upside from revenue synergies. The company also expects to offer more competitively priced plans post-merger, including contract, no-contract monthly, SIM-only, pay-as-you-go and mobile broadband services.

"Our enhanced spectrum position will be the foundation for a faster and more reliable network, and will allow us to deploy a deeper and more robust LTE rollout, particularly in major metropolitan areas," said John Legere, president and CEO of T-Mobile.

Good for T-Mobile?

Weston Henderek, a principal analyst at Current Analysis, told us the deal makes sense for both companies at a high level. MetroPCS immediately becomes more competitive in the U.S. market and T-Mobile gets additional AWS spectrum, which is difficult to come by. But Henderek is not convinced it's a panacea for what ails T-Mobile.

"In the call, T-Mobile really hammered home the same strategy that they've been proceeding with, the challenger strategy, with lots of device financing plans," Henderek said. "I didn't hear anything from T-Mobile that indicates to me they are looking to shift their overall strategy. To me that's a problem because they've been struggling."

For example, T-Mobile still doesn't have the iPhone. Although the merger with MetroPCS may give T-Mobile a greater chance to land the iPhone, there are no guarantees. Another angle on the merger is what happens to MetroPCS-like competitors like Leap Wireless?

"This move makes it more likely that Leap goes running for Sprint. It shows that it's hard to operate as a smaller regional player in this competitive market and you need some kind of scale," Henderek said. "We are coming to a spectrum crunch. This merger increases the possibility of Leap potentially merging with Sprint."

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