T-Mobile and MetroPCS Are Combining

Last week, T-Mobile USA COO John Alling, admitted the company had "lost its way" after AT&T’s $39 billion acquisition of T-Mobile fell apart in late 2011.

Wednesday, Deutsche Telekom (DT) and MetroPCS agreed to merge DT’s T-Mobile USA operations with MetroPCS. There are several things to consider before deciding if this is a good move for either or both companies. Clearly being out of the first few spots in any race is not a great place to be.

Based on analyst estimates for 2012, the combined company is expected to have approximately 42.5 million subscribers, $24.8 billion of revenue, $6.3 billion of adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization), $4.2 billion of capital expenditures and $2.1 billion of free cash flow (defined as EBITDA less capital expenditures) in 2012.

They have combined the management with John Legere, T-Mobile’s new chief executive, leading the new company that will be called, simply, T-Mobile. J. Braxton Carter, vice chairman and chief financial officer of MetroPCS, will become CFO of T-Mobile. Jim Alling, a Starbucks veteran and current chief operating officer of T-Mobile, will lead T-Mobile’s customer unit while Thomas Keys, MetroPCS president, will lead MetroPCS’s customer unit.

The deal is structured as a recapitalization of Dallas-based MetroPCS. MetroPCS is splitting its stock (1 for 2 reverse stock splits) and paying shareholders a one-time dividend of $1.5 billion, or about $4.09 per share. DT is getting 74 percent of MetroPCS common stock, gaining $15 billion in debt and providing $500 million in revolving credit to the combined company. It’s also providing a $5.5 billion backstop for previous deals made by MetroPCS.

T-Mobile is the fourth largest wireless carrier and MetroPCS is the fifth. Together, they’ll still trail third-place Sprint, who has 56 million customers. Sprint is in the process of rolling out a new 4G LTE network to keep its place in the hierarchy.

T-mobile and MetroPCS combined coverage

T-mobile and MetroPCS combined coverage

As a regional carrier, MetroPCS has often only had available 5×5 MHz of 1700 MHz AWS spectrum. The limited bandwidth has resulted in a very slow LTE performance, not something that attract customers from other wireless carriers.

T-Mobile and MetroPCS customers will continue to be served separately, at least until MetroPCS customers are upgraded to T-Mobile’s network by 2015. T-Mobile’s new chief executive John Legere said the merger will provide T-Mobile with a 40 percent increase in contiguous spectrum for LTE and provide particularly dense coverage in major metro areas such as New York and Los Angeles. T-Mobile and MetroPCS said they plan to quickly combine their respective LTE network buildouts, which they said will create "a path to at least 20×20 MHz of 4G LTE in many areas."

This merger of T-mobile with MetroPCS, a much smaller competitor, is unlikely to cause regulators to stop the deal as they did with the AT&T deal last year. Also, this will allow Deutsche Telekom to reduce its T-mobile involvement and investment in a controlled manner by selling off stocks.

BSN* Take

Even though Deutsche Telekom (DT) demonstrated mobile LTE in 2008, they have not been able to grow their T-mobile USA organization. Both T-mobile USA and MetroPCS have more than twice the churn rate compared to Verizon or AT&T. That means customers have been leaving the old T-mobile USA/MetroPCS and going to another wireless carrier.

In Wednesday’s announcement, there was no recognition for the complexity of combining two different technology views on 4G LTE. Just ask Sprint and Clearwire about that one.

Neither T-mobile USA nor MetroPCS have any significant number of business customers or machine-to-machine customers. Business customers will require a significantly higher level of competent support; something that neither company has an outstanding track record for doing.

Neither company has been providing customers with the latest handsets like Apple iPhones nor those from Samsung and HTC. For the lower monthly rates, MetroPCS customers have not been receiving comparable high-speed 4G LTE data service like the top three wireless carriers are providing.

Then you have to get the MetroPCS customers to buy new handsets to take advantage of the new combined T-mobile 4G LTE network. MetroPCS customers are mostly ‘no-contract monthly’ and ‘pay-as-you-go’, thus they can quickly ?churn? without a financial penalty. Will the majority of them jump from their low-cost feature phones to more expensive 4G LTE smartphones?

We predict the development of the combined 4G LTE network backbone will not go as easily as Wednesday’s announcement promised. The new T-mobile is looking at a successful M&A (Merger and Acquisition) along with combining discrepant technologies and rolling out totally new technology, none of which is a piece of cake.