* ISS advice to vote "no" may sway index funds -analyst
* Deal could succeed if it cuts debt by $3 bln-$4 bln
* Eagan Jones advises vote for deal; Glass Lewis yet to
* Shareholders sue to block the April 12 vote
* MetroPCS shares rise more than 4 pct
By Sinead Carew and Harro Ten Wolde
NEW YORK/FRANKFURT, March 28 Deutsche Telekom AG
will likely be forced to sweeten the terms of its
deal with MetroPCS Communications Inc after proxy
advisory firm ISS recommended that shareholders vote against the
proposed transaction, according to analysts.
MetroPCS shares rose as much as 4.8 percent to a session
high of $11.04 on Thursday in New York after 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, Deutsche Telekom's U.S. unit.
ISS, also known as Institutional Shareholder Services,
complained about the negative market response to the deal, a
lower equity split than justified for MetroPCS, and the
company's potential to thrive as a stand-alone company.
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 said the negative recommendation from ISS was a
blow against Deutsche Telekom'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' lead," said Jennifer Fritzsche,
an analyst at Wells Fargo.
Deutsche Telekom said in response to the ISS report that it
still sees the existing merger agreement as beneficial to
itself, MetroPCS and both companies' shareholders.
MetroPCS said the ISS report "contains material flaws and
reaches the wrong conclusion." It also noted that Egan Jones, a
smaller proxy firm, advised its clients to vote for the deal.
Shareholders are still waiting for the recommendation of
another proxy advisory firm, Glass Lewis, which is expected to
issue a report on the deal this week.
A group of shareholders led by the Merger Fund sued the
company in federal court on Thursday, seeking an injunction to
halt the planned shareholder vote. It contends that the company
did not properly explain the deal so shareholders did not have
enough information to vote. They also complained about the
MetroPCS said it intends to vigorously defend itself against
the lawsuit. Representatives for T-Mobile USA were not
immediately available for comment on the lawsuit.
HEAVY DEBT LOAD
Macquarie analyst Kevin Smithen said Deutsche Telekom might
wait until both firms make their recommendations before making
any changes. Smithen raised his price target for MetroPCS stock
to $13.50 from $12 on Thursday as he expects the ISS
recommendation to trigger changes to Deutsche Telekom's offer.
Smithen said if Deutsche Telekom reduces the proposed debt
level for the new company by a range of $3 billion to $4
billion, it would be enough to win shareholder support.
The biggest gripe MetroPCS shareholders have with the deal
is a proposed debt load of $21 billion, according to analysts
Analyst Jonathan Chaplin of New Street Research said
shareholders would likely push for less onerous terms on the
debt and for governance changes as well as lower debt levels,
before they would vote for the deal.
"We believe the transaction has strong strategic and
financial merits; however, we have argued that the terms need to
be amended," 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 and 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 because of opposition by
In the roughly nine months it took for that deal to
collapse, T-Mobile USA lost many customers, 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.
Since Oct. 1, the day before reports emerged that MetroPCS
and Deutsche Telekom were in talks, MetroPCS shares slid as much
as 19 percent to a recent closing low of $9.33 on Jan. 8 - the
day after MetroPCS reported a decline in total subscribers for
the quarter ending Dec. 31, 2012.
On Thursday, MetroPCS shares rose 37 cents, or 3.5 percent,
to close at $10.90 on the New York Stock Exchange.