By Danielle Robinson and John Balassi
Oct 3 (IFR) - Sprint bonds took a hit while MetroPCS saw its bonds jump this week, after the latter scooped up Deutsche Telekom's T Mobile USA unit in a potentially game-changing acquisition.
The merger could mark the beginning of a badly needed consolidation in the bloated US telecom market - and one that could leave Sprint Nextel Corp out in the cold.
Sprint's junk-rated 6.875% 2028 bonds plunged by as much as 1.5 points in dollar price to $90.5 immediately after news of the merger. Though they recovered some of the lost ground by the end of Wednesday, investors were dismayed to hear rumors that Sprint's board had again rejected a merger with MetroPCS
just last week.
"Investors are disappointed that Sprint is not doing (the merger), which was widely hoped for because the two companies are a good fit," said one telecoms analyst.
"Now everyone's waiting to find out what exactly Sprint's strategy is now."
Both Metro PCS and T Mobile have struggled to compete with their giant rivals AT&T and Verizon .
US regulators last year scuppered a planned US$39bn tie-up between AT&T and T Mobile, which has been losing subscribers ever since. Metro PCS has faced a tough battle in the pre-paid space from bigger and higher-rated competitors.
AT&T and Verizon have 105m and 94m subscribers, respectively, with Sprint in third place at 56m. The new company, to be known as T Mobile, starts fourth with a base of 42.5m.
The merger needs both shareholder and regulatory approval. NEW COMPANY, NEW ISSUE
The new T Mobile plans to issue US$1bn in new bonds, and there is also the possibility that much of the $15bn in intercompany loans from Deutsche Telekom to T Mobile USA - which are being taken on by the new company - will be refinanced as high-yield bonds.
Even so, MetroPCS 6.625% 2020s were trading 40bp tighter at 233bp on Wednesday and have tightened 159bp since Monday, as Deutsche Telekom announced a US$5.5bn backstop of all of its existing and new debt issued as part of the acquisition financing.
At 233bp, MetroPCS's single-B rated bonds are now trading as if the company were rated triple-B, like Deutsche Telekom.
But some analysts are unhappy with the fact that the new company will have a junk-rated balance sheet at a time when an investment-grade one would offer a better buffer against tough times ahead.
"The bottom line is that management is targeting a weak double-B credit rating (for the new company)," said Michael Hodel, senior telecom analyst at Morningstar.
"I would at least want a solid investment-grade balance sheet if I had a business that was undertaking as complicated an integration - and facing as difficult a turnaround of operations - that PCS and TM USA are going to face in coming years."
The deal is a "reverse merger", as smaller Metro PCS (9.3m subscribers) is buying the bigger T Mobile USA (33.2m). The deal gives Deutsche Telekom 74% ownership in the new company.
The US$15bn intercompany loan being assumed by the new entity will go onto to the balance sheet as senior unsecured notes, and will likely be refinanced in the capital markets.
The average tenor of the rollover notes is 8.5 years and their projected weighted average yield will be 8%.
The new company also gets an additional US$500m revolver from DT and will issue another US$1bn of debt in the capital markets, which will also benefit from the DT backstop.
The merger also involves a 1-for-2 reverse stock split and a cash payment of US$1.5bn to shareholders.
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(Reporting by Danielle Robinson and John Balassi; Editing by Marc Carnegie)
Keywords: MARKETS CREDIT