* 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 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
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.
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.
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
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.
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
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.