Deutsche Telekom shareholders prefer sweeter US deal to failure

Wed Apr 10, 2013 2:01pm EDT

* Vote on T-Mobile USA merger with MetroPCS on Friday

* Shareholders with 12 pct of Metro shares oppose deal

* DT supervisory board to meet on Wednesday - sources

* 4th place T-Mobile USA losing customers to bigger rivals

By Harro Ten Wolde and Leila Abboud

FRANKFURT/PARIS, April 10 (Reuters) - Deutsche Telekom shareholders are likely to support the group if it sweetens the terms of a proposed tie-up with MetroPCS, as they fear another deal failure would be a big blow to hopes of a turnaround in the United States.

Four shareholders told Reuters they thought Deutsche Telekom's chances of reviving its T-Mobile USA business, which is fourth-place in U.S. market share and losing customers to AT&T and Verizon, would suffer if the deal was rejected by MetroPCS investors in a vote set for Friday.

MetroPCS shareholders holding about 12 percent of the shares have campaigned against the deal, arguing it undervalues MetroPCS and will burden the new company with too much debt.

They got key backing from proxy advisory firms ISS and Glass Lewis, which recommended MetroPCS shareholders should vote against the merger.

As a result, Deutsche Telekom's supervisory board will meet on Wednesday to discuss amending the proposed deal, although a final decision may not be made, two people close to the situation said.

The Wall Street Journal reported earlier that Deutsche Telekom was likely to improve the terms, including reducing the amount of debt that will be transferred to the new company. The paper said an announcement could come as early as Wednesday.

Deutsche Telekom and MetroPCS declined to comment.

"Deutsche Telekom should make some concessions here if it looks like they don't have enough votes to approve the deal - it would be the smart thing do," said Joseph Pasqualichio, a buy-side analyst at Eaton Vance Investment Management.

"If they do, they are a partial beneficiary of the concessions since they will be co-owners of the merged T-Mobile-MetroPCS. The deal not going through would be embarrassing and also bring real complications to DT's U.S. business."

Eaton Vance owned 4.5 million shares in Deutsche Telekom as of Jan. 31, according to Thomson Reuters data.

Under the current terms agreed in October, MetroPCS shareholders would receive $4.06 per share in cash plus stock equivalent to 26 percent of the combined company. Deutsche Telekom would own 74 percent.

SAVING FACE

MetroPCS shareholders have already begun voting by phone and online ahead of a Thursday 11:59pm EST deadline, and can also vote in person at Friday's meeting in Richardson, Texas. Both MetroPCS and Deutsche Telekom can monitor votes as they come in.

If Deutsche Telekom decides to amend the deal terms, the vote would likely have to be rescheduled.

Madison Dearborn Partners, which owns 8.3 percent of MetroPCS shares, supports the deal. MetroPCS' largest shareholder Paulson & Co, which owns 9.9 percent, and investment firm P. Schoenfeld Asset Management are against.

The United States is key to the investment case for Deutsche Telekom, its shareholders said. It earned 26 percent of group revenue there last year and 20 percent of its operating profit.

The German group has long searched for a way to help T-Mobile USA gain critical mass to compete with Verizon, AT&T and Sprint. In 2011, antitrust regulators blocked a $39 billion deal bid from AT&T to buy T-Mobile USA.

The MetroPCS deal was the German group's back-up plan and it also engaged in discussions with Sprint, which is soon to be strengthened with backing by Japan's Softbank.

"It would be a massive setback for Deutsche Telekom if the Metro deal collapses a year after the AT&T deal was cancelled," said a top 20 shareholder in Deutsche Telekom, on condition of anonymity.

The investor added it would be "extremely difficult" for T-Mobile USA to stabilise revenues and operating profit alone.

T-Mobile USA lost 515,000 contract customers in the fourth quarter of 2012 with 33.4 million customers. Last week it announced first-quarter data early, showing it stemmed contract customer losses to 199,000 and gained customers overall.

T-Mobile USA recently overhauled its tariffs to eliminate most phone subsidies and started selling Apple's iPhone after years without it.

Eaton Vance's Pasqualichio said T-Mobile's new marketing strategy was positive but doubted it would be enough without the MetroPCS merger to help it catch up with AT&T and Verizon.

"If the Metro deal fails then Deutsche Telekom has to start looking for another partner for the long-term."

Reviving a T-Mobile tie-up with rival Sprint is seen by bankers and investors as unlikely for now given that Japan's Softbank is buying a 70 percent stake in the third-place mobile player. Such a deal would also face antitrust scrutiny.

SWEETENERS

If Deutsche Telekom wants to win backing for the MetroPCS deal, it could offer MetroPCS shareholders a bigger stake in the new company. Another option is to lower the debt the combined company will owe to Deutsche Telekom or lower the interest rate on a $15 billion intra-company loan, which the dissident shareholders have argued is unfairly priced.

MetroPCS says the loan's interest rate will be about 7 percent but activist fund Schoenfeld, which owns 2.5 percent of the company, puts it at 7.72 percent, and says the loan is effectively a transfer of value to Deutsche Telekom.

Such changes would come at a cost, some shareholders fear.

"There is always the danger of less cash flow (at Deutsche Telekom) and maybe even a lower dividend payment. One cannot exclude it," said a top-50 shareholder who declined to be identified.

However, there is reason to believe that a less indebted MetroPCS would be more valuable long-term, meaning that Deutsche Telekom may not lose out at all from making concessions, said Robin Bienenstock, an analyst at Sanford C. Bernstein.

Bienenstock calculated that each percentage point increase in MetroPCS's ownership in the new company could cost Deutsche Telekom about 0.02 euros per share in valuation.

Every reduction of intra-company loans by $500 million would cost Deutsche Telekom 0.034 euros per share, while reducing the interest on the loan would result in a hit of about 0.01 euros for every 25 basis points, Bienenstock said in a research note.

"At this point we would view failure to make any concessions at all as an unnecessary risk to shareholder value," Bienenstock said, referring to Deutsche Telekom.