When Is Wireless Consolidation Good for Consumers?
On October 2, we first read confirmed reports that Deutsche Telekom was in talks with MetroPCS Wireless on a possible deal to combine T-Mobile USA with MetroPCS. MetroPCS sells flat-rate monthly plans and has 9.3 million subscribers, including about 700,000 customers on its LTE network. The MetroPCS network covers 102 million people in the U.S. MetroPCS's 3G network uses CDMA, a different technology from T-Mobile's GSM-based system. Deutsche Telekom, based in Germany, is the parent company of T-Mobile USA, the fourth-largest U.S. mobile operator. Federal regulators, Headlines readers well know, blocked AT&T’s attempt to acquire T-Mobile last year saying it was anti-competitive. A breakup deal gave T-Mobile $3 billion cash and spectrum licenses in 128 markets. This new deal puts T-Mobile on stabler ground, and could be seen as vindication for the regulators' decision that T-Mobile could compete on its own.
Although the Oct 2 reports indicted talks may not end in a deal, the official announcement that the companies would combine was released the next day. The boards of both companies agreed to a transaction structured as a recapitalization, in which MetroPCS will declare a 1 for 2 reverse stock split, make a cash payment of $1.5 billion to its shareholders and acquire all of T-Mobile’s capital stock by issuing to Deutsche Telekom 74% of MetroPCS’ common stock on a pro forma basis. Deutsche Telekom also agreed to roll its existing intercompany debt into new $15 billion senior unsecured notes of the combined company, provide the combined company with a $500 million unsecured revolving credit facility and provide a $5.5 billion backstop commitment for certain MetroPCS third-party financing transactions. Rough translation: The deal is structured as a reverse merger, meaning MetroPCS in effect will swallow its larger rival. That approach will give T-Mobile a publicly traded stock, which would give T-Mobile parent Deutsche Telekom AG a new route to raise capital for its U.S. subsidiary, as well as a path to pare down its investment in the U.S. over time. (see also With merger, Deutsche Telekom finally has viable plan for US market)
The combined company would have:
- approximately 42.5 million subscribers,
- $24.8 billion of revenue,
- $6.3 billion of adjusted income before interest and taxes and depreciation and amortization have been subtracted (EBITDA),
- $4.2 billion of capital expenditures, and
- $2.1 billion of free cash flow (defined as EBITDA less capital expenditures) in 2012.
The merger is between the nation's fourth- and sixth-largest wireless carriers by revenue, but T-Mobile will not move any farther ahead in the list of largest U.S. cell phone companies. The combined company will still be smaller than third-place Sprint both in terms of sales and number of subscribers.
The combined companies have 29.5% of the prepaid market, according to Sanford C. Bernstein. [Consumers who opt for a prepaid mobile phone purchase credit in advance of service use. The purchased credit is used to pay for mobile phone services at the point the service is accessed or consumed.] MetroPCS helped pioneer affordable, no-contract cellphone service in the U.S.
Both companies have been struggling. Though each remains profitable, their smartphone offerings are lackluster (i.e., no iPhone), they are far behind the curve on network technology, and both are shedding customers. “These are not two robust, growing entities that are combining,” said Kevin Smithen, an analyst at Macquarie Securities USA Inc. in New York. “These are two companies that had significant operations issues. We are skeptical.”
Bloomberg was quick to note that the structuring of the agreement reveals how the value of T-Mobile may have dropped by $13 billion amid client losses following the failed sale to AT&T. Deutsche Telekom had agreed to sell T-Mobile for $39 billion to AT&T; now T-Mobile is worth about $26 billion including debt, based on MetroPCS’s share price and analyst estimates.
GigaOm’s Kevin Fitchard wrote that T-Mobile’s aims for merging with MetroPCS are pretty clear: to harvest the regional carrier’s spectrum to bulk up its LTE network in key cities such as New York City, San Francisco and Los Angeles. In the top 25 markets, T-Mobile will see its average spectrum holdings increase from 63 MHz to 76 MHz, and much of those gains will be in the Advanced Wireless Service (AWS) band where both companies are launching LTE. T-Mobile currently has the spectrum to launch a 20 MHz network in half of its metro markets, but it would only be able to support a 10 MHz network in other regions. Metro’s licenses certainly don’t fill in all of those holes, but in 11 major cities the combined company will have more 50 MHz of AWS spectrum, enough for the new T-Mobile to launch a mammoth 40 MHz network. That’s double the size of any 4G network market leaders AT&T and Verizon have today.
The new company plans to deploy a 4G-LTE network that will work across both customer bases. Company executives said they expect all MetroPCS users to be migrated to T-Mobile's network by the end of 2015. But upgrading all customers discontinuing the legacy technologies will be a gradual, multi-year process. That complex migration will be expensive -- unexpected delays and obstacles could wipe out the $6 billion to $7 billion the two companies say they will gain from "cost synergies" -- and is "a major risk for derailing the benefits of the deal," according to Mike Roberts, analyst at Informa Telecoms & Media. (see also T-Mobile, MetroPCS Outline Quick Move to LTE)
One of the unstated benefits of the merger with MetroPCS is one that T-Mobile’s customers have been clamoring over for years: the iPhone. T-Mobile is already on a technology trajectory that will make its network compatible with the iPhone 5’s fickle radios. But tying up with MetroPCS will get T-Mobile there a lot faster.
The proposed deal will allow the combined company to push unlimited data plans, as a counterbalance to the other major carriers’ attempts to charge customers according to their use. “The combination of our complementary spectrum will allow our combined company to drive unlimited as a key differentiator,” T-Mobile President and CEO John Legere told reporters. “That’s a big part of who we are now and who we’ll be in the future.” The decision to compete with major carriers Verizon and AT&T by continuing to offer unlimited data plans addresses what has been a major concern for policymakers.
For federal regulators, the deal will solve one problem for regulators by giving industry leaders Verizon Wireless and AT&T more competition. Combining T-Mobile’s and Metro’s spectrum holdings, along with the frequencies T-Mobile won from AT&T when that merger failed, the airwaves T-Mobile gained in a swap with Verizon, will make the new company a more formidable competitor. The merger would strengthen two players that have both struggled against the dominant carriers, analysts said. "If anything, it's improving the competitive landscape," said Phil Marshall of Tolaga Research. But the deal could also create new complications: Fewer competitors at the price-sensitive low end of the market and create an increasingly concentrated prepaid cellphone market. After the deal, three companies -- T-Mobile, Sprint, and América Móvil unit TracFone -- will account for three-quarters of all prepaid cellphone customers, according to data from UBS. And while MetroPCS focuses solely on the prepaid business, the new T-Mobile will need to make sure that its prepaid offerings aren't so attractive that they lead so-called postpaid customers to dump their contracts and end of month bills, which typically are more lucrative for carriers than month to month plans. And T-Mobile's prepaid plans, unlike MetroPCS's, provide high-speed data covering the whole country. But they're significantly more expensive. A month-to-month plan with unlimited talk and text and 2 gigabytes of high-speed data costs $60 at T-Mobile. At MetroPCS, a similar plan with 2.5 gigabytes of high-speed data can be had for $50 a month, while an unlimited talk, text, and data plan is available for $55.
Even before the merger was formally announced, the Communications Workers of America voiced concerns with the deal, saying it could lead to possible job losses. CWA was a big champion of AT&T's bid to buy T-Mobile. AT&T employs 40,000 wireless employees who are members of the CWA. Most of T-Mobile's U.S. workforce is not unionized with the exception of 16 employees in Connecticut and so CWA viewed the merger with AT&T as a way to add more unionized workers. CWA said that both T-Mobile and Metro PCS send a lot of work offshore and the union worries that more jobs will be lost by their merger.
The overall narrative now is that the regulatory concerns this time round appear to be much milder than the proposed deal involving AT&T. Both companies are relatively small, and T-Mobile USA has been losing subscribers for the last two years. http://www.latimes.com/business/la-fi-tmobile-metropcs-20121004,0,765398...
Rep Henry Waxman (D-CA), the Ranking Member on the House Commerce Committee, said “Consumers benefit from strong, vibrant competition in the wireless marketplace. Competition on a national scale can bring innovation, better service, and lower prices to consumers everywhere. The proposed merger between T-Mobile and MetroPCS may have the potential to enhance nationwide wireless competition and benefit consumers throughout the United States. I urge the Department of Justice and the Federal Communications Commission to review the merits of this proposed transaction rigorously but swiftly.”
Rep. Anna Eshoo (D-CA), the top Democrat on the communications subcommittee and a critic of the AT&T deal, said she hopes regulators conduct a "thorough, but swift review." "At a time when two companies continue to dominate the wireless marketplace, the need for a strong national competitor has never been greater," Eshoo said. "The proposed merger of T-Mobile and MetroPCS has the right ingredients to provide consumers with a viable alternative for wireless voice and data service."
Free Press, a consumer advocacy group that lobbied against the AT&T deal, said the marketplace needs stronger competitors to push back against AT&T and Verizon. "But consolidation at the bottom between a regional prepaid carrier and the last-place national carrier is not going to fix all of the problems in our wireless market," Policy Director Matt Wood said. "The FCC is going to have to formulate bold public policies to bring consumers the relief they need."
John Bergmayer, a senior staff attorney at Public Knowledge, said he expected the FCC to examine the deal's impact on the prepaid market as part of its usual review of whether the merger is in the public interest. Bergmayer said, however, that he believed the merger was good for consumers. T-Mobile says it wants to continue to present itself as the better-value alternative to AT&T and Verizon Wireless, and that the merger with MetroPCS will provide added scale to help it compete. "They're not going to become mini-Verizon," Bergmayer said. "I'm not going to be thrilled to see the number of competitors go down, but I think in the context of trying to keep up with AT&T and Verizon it actually makes a lot of sense."
Los Angeles consumer columnist David Lazarus wrote that consumers would normally shake their heads in dismay at news of yet another market-shrinking telecom merger. But T-Mobile USA gobbling up rival MetroPCS is one of those rare examples of a corporate roll in the hay actually being in consumers' best interest — at least for a while. Short term, a revitalized T-Mobile helps prevent the near-duopoly of Verizon and AT&T from owning the entire wireless market. Longer term, however, all this merger does is set the table for even more consolidation. The most likely scenario: A few years down the road, Sprint and T-Mobile will say they need to merge to compete with the two heavyweights. He warns that AT&T and Verizon, with their seemingly bottomless pockets, are buying their way to wireless dominance, rather than competing toe-to-toe on pricing or pumping big bucks into technological advances. He fears that this will leave less coverage available for Sprint and T-Mobile, which will inevitably conclude that yet another merger will be the only way they can remain viable. Regulators, in turn, will be forced to say that having three players is better than two.
As we did with the failed AT&T/T-Mobile deal, and Verizon’s successful purchase of spectrum from cable companies, Benton will be tracking the review of this deal by regulators. Check here for updates. And we’ll see you in the Headlines.