Sprint stock surge gives board more sway for a MetroPCS bid

October 5, 2012 06:27 AM

Sprint Nextel Corp.’s Dan Hesse and his board are expected to meet for the second time this year to consider whether to buy MetroPCS Communications Inc. The verdict may be different this time.

Hesse, Sprint’s president and chief executive officer, is evaluating a bid after watching Deutsche Telekom AG swoop in with a deal to merge its T-Mobile USA business with MetroPCS, according to people familiar with the matter. Sprint’s board rejected a MetroPCS takeover plan in February because it was too costly, people with knowledge of the talks said at the time.

Following a surge in its stock price, Sprint may be more likely to make a deal now, said Chris Larsen, an analyst at Piper Jaffray & Co. The shares have more than doubled since February, giving Sprint more buying power. Investors also are signaling that they want the company to be part of the industry’s consolidation, Larsen said. That could put pressure on the board to act.

“A Sprint counteroffer may just make sense,” Larsen, who is based in New York, said in a report. The company could pay $15 a share for MetroPCS, which closed at $12.69 yesterday, and still profit from the deal, he said.

Sprint, the third-largest U.S. wireless carrier, is crunching the numbers and holding talks with its advisers to weigh the feasibility of a higher offer, said the people, who asked not to be identified because the discussions are private. The Overland Park, Kansas-based company’s board is meeting to discuss the matter and could decide as early as next week whether to pursue a deal, the people said.

M&A Executive

Sprint also said yesterday that Keith Cowan, its president of strategic planning and corporate initiatives, will delay his planned departure by three months until January. Since he handles mergers and acquisitions, the move may suggest Sprint is considering a bid, Jennifer Fritzsche, a Wells Fargo & Co. analyst in Chicago, said in a note.

Scott Sloat, a Sprint spokesman, declined to comment on whether the company is evaluating potential counterbids. Andreas Fuchs, a Deutsche Telekom spokesman, also declined to comment on a potential bid by Sprint, as did MetroPCS.

Deutsche Telekom is proposing a reverse merger that would make T-Mobile a publicly held company. Investors haven’t responded favorably to the complex deal, sending MetroPCS shares down 9.8 percent on the day the details of the transaction was announced. Shareholders would rather see a straight acquisition than a reverse merger, Larsen said.

Deal Terms

Deutsche Telekom’s deal would leave MetroPCS investors with 26 percent of the new entity and $1.5 billion in cash. The ultimate value would hinge on how much synergy the two sides can realize.

Sprint may have an edge because it uses the same kind of network standard as MetroPCS: code division multiple access, or CDMA. T-Mobile relies on the global system for mobile communications, or GSM. All the companies are moving toward a new standard called long-term evolution, or LTE. Still, having different networks may cause headaches in the interim, making a Sprint-MetroPCS tie-up more palatable, Larsen said.

“A merger of these two would be able to attain synergies faster and have less network integration risk,” he said.

Sprint also is No. 3 in the industry, with more than 56 million customers at the end of June, while T-Mobile is a distant fourth. By absorbing MetroPCS’s 9.3 million customers, Sprint would close the gap with AT&T Inc. and Verizon Wireless. T-Mobile had 33 million customers at the end of June, so it would remain No. 4 after a merger with MetroPCS.

Stock Rebound

MetroPCS’s stock was unchanged at $12.69 at 10:32 a.m. in New York. The shares have advanced after Bloomberg News reported that Sprint was considering an offer, rebounding 18 percent from an intraday low of $10.96 yesterday. Sprint shares rose 3.1 percent to $5.25.

A challenge for either buyer would be hanging on to MetroPCS’s customers, who are prepaid users without long-term contracts. The carrier offers a pay-as-you-go service that appeals to young people and consumers with poor credit. That makes it a difficult business, Larsen said.

Another potential obstacle to a counteroffer is the breakup fee, said one of the people familiar with the discussions. MetroPCS would pay $150 million if it backs out of its current deal. The reverse breakup fee for T-Mobile is $250 million.

Deutsche Telekom is prepared for a counterbid from Sprint and would consider better terms if necessary, according to another person familiar with the matter.

Previous Talks

When Sprint abandoned plans earlier this year to buy MetroPCS, the deal was expected to cost as much as $8 billion, including debt, the people familiar with the plan said. Since then, Sprint’s stock has outpaced shares of the acquisition target. MetroPCS currently has a market value of $4.61 billion, while Sprint is valued at about $15.3 billion.

The wireless industry has considered other ways to consolidate. Sprint has held talks with Deutsche Telekom about a deal with T-Mobile, and the German company has considered buying another prepaid carrier, Leap Wireless International Inc., people familiar with the discussions said. Greg Lund, a Leap spokesman, declined to comment on those talks.

AT&T had sought to buy T-Mobile for $39 billion last year, though it walked away from the deal after regulators objected. Soon after, Deutsche Telekom started talking with MetroPCS and other potential partners, people with knowledge of the negotiations said. The talks with MetroPCS accelerated after it reported better-than-expected second-quarter earnings on July 26, they said.

“Sprint might be in a position to offer PCS shareholders a more favorable deal,” Wells Fargo’s Fritzsche said.

Bloomberg News

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