UPDATE 2-MetroPCS' shares soar on T-Mobile merger talk

Wed May 9, 2012 1:59pm EDT

* MetroPCS, Leap shares surge

* Wall Street thinks industry needs to consolidate

* Deutsche, MetroPCS decline comment on Bloomberg report (Adds details on industry consolidation, executives' comments, updates stock prices)

By Sinead Carew

May 9 (Reuters) - Shares of MetroPCS Communications Inc surged as much as 29 percent on Wednesday after Bloomberg reported the mobile phone service provider was discussing a merger with Deutsche Telekom subsidiary T-Mobile USA.

Many Wall Street analysts argue that consolidation is needed among smaller U.S. carriers as the bill for 4G network upgrades climbs and smartphone usage accelerates.

Deutsche Telekom was considering a stock swap that would give the German company control over a combined entity, Bloomberg cited two unidentified sources as saying. Other options included an initial public offering or an outright sale of T-Mobile USA, Bloomberg cited its sources as saying.

MetroPCS and Deutsche Telekom both declined comment on Bloomberg's report.

The report came amid persistent speculation on Wall Street about consolidation among carriers. On Wednesday, shares of Leap Wireless - another company often mentioned as an acquisition or merger candidate - gained as much as 25 percent.

Some analysts have speculated that smaller carriers might band together to better compete with the likes of industry leader Verizon Wireless and No. 2 carrier AT&T Inc, which had tried to buy T-Mobile before the deal was scrapped over regulators' fears it could hurt consumers.

MetroPCS and rival Leap Wireless, which cater to cost-conscious customers, have been feeling heat as bigger rivals such as Sprint Nextel Corp enter their low-cost phone markets.

Analysts say Deutsche Telekom has wanted to unload T-Mobile because of the expense - estimated in the billions of dollars - of having to upgrade U.S. networks over the long-term.

MetroPCS and T-Mobile are not a good technological or customer fit, one analyst said, although both are expected to move to faster, fourth-generation "LTE" networks eventually.

"It would make no sense at all," said Roe Equity Research analyst Kevin Roe, noting that T-Mobile USA and MetroPCS networks run on different technologies.

MOUNTING COSTS

A deal would also not alleviate T-Mobile's spectrum shortage.

"MetroPCS is spectrum- and capacity-constrained," Roe added.

MetroPCS stock was up 19.7 percent at $7.85 on Wednesday afternoon, following a brief trading halt. It hit a high of $8.45 earlier in the session.

Leap Wireless stock was up 20.4 percent at $6.19 in the afternoon, off an earlier high at $6.43.

Mobile carriers are on the prowl for additional wireless spectrum and are spending heavily to upgrade or expand their networks as they seek to cope with the growth of smartphones and multimedia-streaming on handheld devices. Sprint had also considered a plan to buy T-Mobile but abandoned it.

"Because of our focus on execution and network vision a deal would have to be very compelling for us to do it at this time," Sprint CEO Dan Hesse told the CTIA wireless industry conference in New Orleans on Tuesday. (Reporting by Sinead Carew in New York, writing by Edwin Chan; Editing by Carol Bishopric and Matthew Lewis)

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