* Deutsche Telekom has deal to merge T-Mobile with MetroPCS
* Investors owning about 12 pct of MetroPCS oppose deal
* MetroPCS shareholders to vote on deal on April 12
* DT, MetroPCS, T-Mobile execs meeting investors this week
* Deal key to DT bulking up in US, freeing up resources
By Harro Ten Wolde and Leila Abboud
FRANKFURT/PARIS, March 25 Deutsche Telekom
is on a final charm offensive to win over MetroPCS
shareholders to a merger with its U.S. business, which it needs
to close the gap with bigger U.S. rivals and free up resources
to invest in Germany.
While MetroPCS agreed the deal in October, activist
shareholders holding about 12 percent of its stock contest the
terms and are campaigning for others to help vote it down.
Failure for Deutsche Telekom, which has already had an
attempt to sell its T-Mobile US arm to AT&T knocked back
by competition regulators, could have big repercussions.
At the least, the German group could have to sweeten its
proposal for MetroPCS. At worst it could be left a distant
fourth in the U.S. mobile market, pumping in money it needs in
Germany to reverse losses in broadband customers to cable firms.
"There are no other options left other than trying it on
their own in the U.S. They will be set back two years in time
(if the deal fails)," said a Deutsche Telekom shareholder who
met with the Bonn-based company last week.
Having won regulatory approval, the MetroPCS merger now
needs support from a majority of the U.S. firm's shareholders in
a vote on April 12. In a bid to secure this, Deutsche Telekom,
MetroPCS and T-Mobile US executives began meetings with MetroPCS
investors on Wednesday that continue this week.
But they face opposition led by investment firm P.
Schoenfeld Asset Management, which has called the deal
"irresponsibly and inefficiently structured," arguing the terms
undervalue MetroPCS and saddle it with debt at high rates.
Critical to the outcome could be shareholder advisory firm
ISS, which Deutsche Telekom met last Thursday and which may
publish its recommendation on how MetroPCS investors should vote
as early as Tuesday or Wednesday. Advisory firm Glass Lewis will
also weigh in later this week.
"If the ISS recommends shareholders vote against the deal in
its current form, it will put a lot of pressure on Deutsche
Telekom to revise the terms," wrote Nick Brown, analyst at
Espirito Santo investment bank in a research note.
The Deutsche Telekom shareholder, who spoke anonymously
because his discussions with the company were private, said the
German group was "pretty convinced" it would get enough votes
but was checking with big MetroPCS shareholders to be sure.
"It all depends on the feedback they will get in the coming
days, whether they will consider a deal with better terms."
Deutsche Telekom has long searched for a solution to help
T-Mobile US compete with bigger rivals Verizon, AT&T and
Sprint. In 2011, antitrust regulators blocked a bid from
AT&T to buy T-Mobile US. That $39 billion deal would have left
Deutsche Telekom holding 8 percent of the larger company.
Deutsche Telekom talked to other operators including Sprint
in a bid to gain critical mass in the United States - which is
nearly 70 percent controlled by the top two players - and
settled on MetroPCS.
Under the October deal, MetroPCS shareholders will get $4.06
per share in cash plus stock equivalent to 26 percent of the
combined company. Deutsche Telekom will own the rest.
The new company will have almost $19 billion in net debt,
including a $15 billion loan from Deutsche Telekom, which rebel
MetroPCS shareholders say is unfairly priced.
MetroPCS says the loan's interest rate will be about 7
percent but activist 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.
MetroPCS' largest shareholder Paulson & Co, which owns 36.3
million shares or 9.9 percent, has come out against the deal.
On Monday, MetroPCS wrote to shareholders urging them to
vote in favour, arguing the deal would boost growth and
insisting the debt was well-priced for MetroPCS.
A Deutsche Telekom spokesman declined to comment on whether
the group would consider improving its offer and reiterated the
current proposal was the best for shareholders of both firms.
If Deutsche Telekom fears the deal is at risk, it could
alter the loan terms or accept a smaller proportion of the new
company's shares. It could also extend the 6-month lockup period
for it to keep shares in the combined company.
Without MetroPCS, which focuses on the pre-paid segment,
T-Mobile US may need a revamped strategy. A tie-up with another
rival such as 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.
T-Mobile US lost 515,000 contract customers in the fourth
quarter although total customers rose by 61,000. It holds an
event in New York on Tuesday at which it is expected to announce
new value plans and potentially the launch of Apple's iPhone.
A collapse of the MetroPCS deal would also have consequences
for Deutsche Telekom in Europe, if it then needs to plough money
into the United States to operate T-Mobile US on its own.
Deutsche Telekom has long said its priorities are Germany
and the United States. It plans to invest almost 30 billion
euros ($39 billion) over three years on upgrading its broadband
in Germany and on faster mobile technology in the United States.
Adrian Pehl, analyst at German broker Equinet, said Deutsche
Telekom might have to consider asset sales in Europe if the
MetroPCS deal fell through, such its 50 percent stake in EE,
Britain's largest mobile operator, or its Dutch mobile unit.
Deutsche Telekom and France Telecom, its partner in
EE, have said that listing part of British operator this year
was their preferred option. Analysts value DT's stake in EE at
5.76 billion euros, and the Dutch unit at 2.57 billion.
Moody's credit analyst Carlos Winzer said Deutsche Telekom
would have options to step up investment in its U.S. business
without MetroPCS. "If it fell through completely it would be
(credit) neutral for DT. For other scenarios we would need to
see terms," he said.