Wednesday was a good day to own MetroPCS Communications and Leap Wireless International as the postpaid cellphone carriers jumped higher on over three times the average volume for both companies. MetroPCS popped over 20 percent to a high of $8.45 Wednesday when Bloomberg reported Deutsche Telekom, the parent company of T-Mobile USA, and MetroPCS are in possible merger talks.
MetroPCS is headquartered in Texas and currently has 9.3 million customers located primarily in 13 metropolitan areas. Leap Wireless followed higher as well, on speculation that it may also become in play soon.
T-Mobile is the largest postpaid carrier not offering the Apple iPhone after Sprint Nextel added Apple products last year. T-Mobile’s lack of iPhone sales is cited as one of the larger contributing causes of subscriber migration to other carriers. Last year, T-Mobile experienced a brutal subscriber decline of over 6 percent.
When comparing the major carriers, T-Mobile ranks first as the value price leader. Even with such competitive pricing, T-Mobile needs to do more soon. T-Mobile needs to address subscriber losses or it runs the risk of losing critical mass. To remain profitable, it is important to have the highest possible density of customers.
After fixed costs are met, each additional revenue dollar falls almost directly to the bottom line. Adding an additional low-cost provider appears to be complimentary for both T-Mobile and MetroPCS. While it would appear that a competitive advantage could be gained by combining networks, I will describe why this deal is unlikely to happen.
If we search back to the failed AT&Toffer for T-Mobile, we may gain insight to what MetroPCS is worth. AT&T offered to buy T-Mobile for $39 billion and would receive about 33 million customers in addition to the network. AT&T’s offer came to over $1,000 per subscriber, but T-Mobile is arguably more valuable per subscriber than that, even after factoring in T-Mobile’s current customer loss rate.
T-Mobile and AT&T also share the same type of network and have roaming agreements. The synergies and cost efficiencies with merging T-Mobile into AT&T would have saved build-out costs for AT&T. No such cost savings is obvious with T-Mobile and MetroPCS.
T-Mobile and MetroPCS use two incompatible systems with which to deliver calls. This problem alone should be a deal killer. However, even if the companies are crazy enough merge, don’t expect much more than a Frankenstein result. We have seen this plot played out before. The main characters were Sprint and Nextel then. If any lesson was learned, Sprint proved that some things just shouldn’t be combined.
Sprint or Verizon Communications might make a better merger with MetroPCS from a compatibility standpoint. Verizon and MetroPCS both use LTE 4G technology and MetroPCS can use Sprint or Verizon towers. Can T-Mobile run both systems? Sure, and the towers can be switched out from CDMA to GSM. However, a change like that results in many phones being unable to receive a dial tone.
Using the above $1,000 per customer back of the envelope number, we arrive at a valuation of about $9 billion rounded. Nine billion dollars is north of $22 per share, a price not seen by shareholders since 2007. Based on the forward earnings projections, a price of $22 is about 30 times earnings. A buyout at 30 times earnings is rich, but not extreme enough to be dismissed immediately.
Using a more conservative number of 20 times earnings, we arrive near $15 a share. With the recent weakness in MetroPCS, many shareholders may not get too excited with an offer of only $15 per share. There are too many problems with this deal to seriously believe it is going to happen. There are regulatory, valuation, technical, and timing issues to overcome, and each is a potential show stopper. As a result, if you’re thinking of buying MetroPCS in hopes of making a fast buck, you may find yourself standing without a chair when the music stops playing.
—Robert Weinstein, Contributor, TheStreet.com
Additional News: T-Mobile Wants to Grow Again
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