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* ISS says deal undervalues MetroPCS
* ISS also notes negative response by market to the deal
* Second biggest MetroPCS investor is in favor of the deal
By Sinead Carew
NEW YORK, March 27 (Reuters) - Influential proxy advisory firm ISS threw its weight behind opponents of MetroPCS Communications Inc's proposed merger with T-Mobile USA, saying the deal undervalued the company and shareholders should vote against it.
MetroPCS agreed to the merger with the Deutsche Telekom unit in October but activist shareholders holding about 12 percent of its stock contest the terms and are campaigning for others to help vote it down.
The deal cannot close without approval from MetroPCS shareholders but in its favour, the company's second biggest investor Madison Dearborn, which holds about 8.3 percent, has said from the start it supports the merger. U.S. regulators have also given their blessing.
ISS's advice came after T-Mobile USA Chief Executive John Legere said on Tuesday he expects shareholders to approve the deal.
The wireless carriers argue a merger is necessary to compete with much larger rivals Verizon Wireless, AT&T Inc and Sprint Nextel Corp.
"Because of the negative market response to this transaction..., the lower equity split than justified by the contribution of PCS to the combined entity, and the potential for PCS to continue to thrive as a stand-alone company, shareholders should vote against this transaction," ISS said in a statement provided to Reuters late on Wednesday.
Activist investor P. Schoenfeld Asset Management LP, which says it owns about 2.5 percent of MetroPCS, is leading a proxy battle against the deal, which shareholders will vote on at a special meeting on April 12.
The company's biggest investor, Paulson & Co with a 9.9 percent stake, has also said it would vote against it. Both shareholders have complained about the deal's valuation and the level of debt that would be assigned to the new company.
Under the terms of the deal, 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.
MetroPCS shares have slid some 14 percent since the merger was first announced. They closed down at $10.53 prior to the release of the ISS statement.