* ISS advice to vote no may sway Index funds-analyst
* DT could be forced to change debt terms - analyst
* MetroPCS shares closed at $10.53 on New York Stock Exchange
NEW YORK, March 28 Deutsche Telekom AG will likely be forced to sweeten the terms of its deal with MetroPCS Communications Inc after a proxy advisory firm recommended that shareholders vote against the proposed transaction, according to analysts.
Corporate governance consultants ISS said late on Wednesday that it was backing the efforts of two big MetroPCS shareholders to block the company's proposed merger with T-Mobile USA, the U.S. arm of Deutsche Telekom.
Paulson & Co, the biggest MetroPCS shareholder, and another big holder P. Schoenfeld Asset Management had both committed to vote against the deal on concerns about the valuation and the amount of debt being assigned to the combined company.
Even so, another big shareholder Madison Dearborn had put its support behind the deal.
Analysts saw a negative recommendation from ISS as a blow against DT's current offer which shareholders are set to vote on at a special meeting April 12.
"In our view, this is a very significant development as index funds tend to follow ISS's lead," said Jennifer Fritzsche, an analyst at Wells Fargo.
Another analyst Jonathan Chaplin of New Street Research said that in light of the ISS recommendation, shareholders would likely look for lower debt, less onerous terms on the debt and governance changes before they would vote for the deal now.
"We believe the transaction has strong strategic and financial merits; however, we have argued that the terms need to be amended to lower the debt on the pro forma company," Chaplin said.
T-Mobile USA, the No. 4 U.S. mobile provider, and its smaller rival MetroPCS want to pool their spectrum resources and networks in order to compete better with bigger rivals such as Verizon Wireless, AT&T Inc, Sprint Nextel.
Under the terms of the reverse-merger announced in October, Deutsche Telekom would end up with a 74 percent stake in the combined company, and MetroPCS would declare a 1-for-2 reverse stock split and pay $1.5 billion in cash to its shareholders.
If the deal collapses it would be a huge blow for Deutsche Telekom, since in 2011 it had to abandon its plan to sell T-Mobile USA to AT&T for $39 billion due to opposition by regulators.
In the roughly nine months it took for that deal to collapse, T-Mobile USA lost many customers, it having been distracted from its core business.
On top of these issues the companies are expected to soon face tougher competition from an emboldened Sprint, which has agreed to sell 70 percent of its shares to Japan's SoftBank Corp for $20 billion.
P. Schoenfeld Asset Management LP, which says it owns about 2.5 percent of MetroPCS, is leading a proxy battle against the deal.
Paulson & Co has a 9.9 percent stake and Madison Dearborn owns about 8.3 percent of MetroPCS shares, according to the most recent public disclosures.
MetroPCS shares have slid more than 8 percent since Oct. 1, the day before reports emerged that MetroPCS and Deutsche Telekom were in talks. They closed at $10.53 on Wednesday, prior to the release of the ISS statement.