PCS, S, ATT: A Perfect Storm Brewing In Telecom Market

PCS, S, ATT:  A Perfect Storm Brewing In Telecom Market

The ongoing consolidation in the US telecom market is creating more and more opportunities. After failing to merge with AT&T Inc. (NYSE:T), Deutsche Telekom AG (FRA:DTE) (PINK:DTEGY) (ETR:DTE) has been wooing MetroPCS Communications Inc (NYSE: PCS) for a merger with its US unit T-Mobile USA, Following the cold initial response of MetroPCS shareholders to the deal, Deutsche Telekom has sweetened its offer for MetroPCS in a bid to fend off opposition. What it also aims as a result is to get a majority vote during MetroPCS’ next shareholders meeting, which has been postponed to April 24.

The new deal promises to reduce the debt of the merged company from $15 billion to $11.2 billion in addition to lower the interest on shareholder loans by 0.5%. As another measure to alleviate some of the concerns, Deutsche Telekom now has proposed a longer lock-in period of 18 months compared to 6 months previously. The equity structure will remain the same, with Deutsche Telekom owning 74% of the new company compared to 26% for current MetroPCS shareholders.

PCS, S, ATT:  A Perfect Storm Brewing In Telecom Market

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Unlike the proposed deal with AT&T Inc. (NYSE:T) which was scuttled by the Justice Department on antitrust grounds, Deutsche Telekom AG (FRA:DTE) (PINK:DTEGY) (ETR:DTE) has received regulatory approvals for the deal with MetroPCS Communications Inc (NYSE:PCS). Deutsche Telekom’s offer had a positive effect on MetroPCS shares which jumped 3.5% in early trade yesterday. There are no doubts about T-Mobile’s struggles but a look at MetroPCS reveals it is also not in a great position.

The company has an unfavorable capital structure which is primed to sap much of its future earnings. As a result, its forward price earnings ratio at 15 is greater than the one for trailing 12 months. Not to mention it does not pay dividends as of now. However, the deal promises to take care of much of these concerns. The combined entity will have greater spectrum depth in the major urban areas so that it can provide better services. T-Mobile has recently launched LTE service in seven locations and its value-oriented strategy, coupled with MetroPCS’ experience in the prepaid market will make a lot of sense for shareholders.

Meanwhile, the company stands to face strong competition from a reenergized Sprint Nextel Corporation (NYSE: S) after its partnership with Softbank Corp (PINK:SFTBF). Sprint Nextel Corporation (NYSE:S) will have deeper financial clout once its deal with Softbank fully approved by regulators. There is no clarity on this front yet, but once the dust settles, we might see some update about full acquisition of Clearwire Corporation (NASDAQ:CLWR). Nevertheless, further gains in the stock will likely be difficult to come by. The stock is already trading near 52 week high levels and has most positives factored in the price. And just in case, if the deal with Softbank fells through, then its extremely high debt equity ratio 3.4 is enough to cripple its already dilapidated financial situation. Unlike MetroPCS Communications Inc (NYSE:PCS), Sprint has loss generating operations.

On the other end of the market, AT&T Inc. (NYSE:T) has established a strong presence as premium player and has clear advantages over its rivals on LTE roll-out and uptakes, as well as monetization through share data plans. It has gained 12.5% over the last 3 months and trades at 52 high levels but still carries generally positive recommendations from brokerage houses. The company is the leading player in the US telecom market and as such commands a premium in valuations as reflected in current price earnings ratio of 31.5. Considering its unique position in the market, the stock is still undervalued as also underlined by forward price earnings ratio of just 14.1. The stock’s much sobered balanced sheet and a smart dividend yield of 4.7% are other factors which can attract more investors to the stock.

Overall, the sweetened deal for MetroPCS Communications Inc (NYSE:PCS) paves way for a long rally in its shares, while Sprint, despite emerging as a strong value-end candidate has largely shared its growth story with the market and as such, further gains look limited.

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