-- MetroPCS has signed a definitive agreement to combine with T-Mobile USA, a subsidiary of Germany-based Deutsche Telekom AG (BBB+/Stable/A-2).
-- We are placing our ratings on MetroPCS, including our 'B+' corporate credit rating, on CreditWatch with positive implications.
-- We believe the combined company's credit profile could benefit from larger scale, including greater operating efficiency, better equipment pricing, and more spectrum to accommodate the upgrade of the combined network to LTE.
-- However, we still expect the combined company to be competitively disadvantaged relative to the larger national players Verizon and AT&T Mobility.
Rating Action On Oct. 3, 2012, Standard & Poor's Ratings Services placed its ratings on MetroPCS Communications Inc.
on CreditWatch with positive implications following the company's announced definitive agreement to combine with T-Mobile USA, a subsidiary of Germany-based Deutsche Telekom AG
BBB+/Stable/A-2). The CreditWatch placement affects its 'B+' corporate credit rating, the 'BB' issue-level rating on the senior credit facilities and the 'B' issue-level rating on unsecured notes, both at subsidiary MetroPCS Wireless Inc.
We believe the combination of MetroPCS and T-Mobile USA could result in an improved business risk assessment as a result of larger scale, including greater operating efficiency, better equipment pricing, and more spectrum to accommodate the upgrade of the combined network to LTE. We currently view MetroPCS' business risk as "weak," based on the potential for pricing volatility and high churn in the prepaid segment in which it operates.
Importantly, however, we also believe the combined entity would remain competitively disadvantaged relative to the larger national players Verizon Wireless and AT&T Mobility, both of which have a larger postpaid base, higher average revenue per user due in part to their growing iphone base, and much larger scale. We also believe there are significant integration risks, particularly given that the two companies run their wireless networks on different technology platforms. MetroPCS uses the CDMA standard for voice services and LTE for fourth-generation data services, while T-Mobile relies on GSM for voice and HSPA+ for data. Ultimately, though, both companies expect to converge toward the LTE standard.
Initially, we estimate that leverage for the combined company would be in the low-4x area, based on the companies' EBITDA expectations for 2012, adjusted for estimated operating leases, and including 100% of the DT rollover debt. This financial metric would be consistent with an "aggressive" financial risk profile, our current assessment on MetroPCS on a stand-alone basis.
Another potential factor in our analysis would be the degree of support we would attribute to majority owner DT. Initially, we would not expect to equalize the ratings of a combined MetroPCS and T-Mobile with those of DT in the absence of a debt guarantee; however, it is possible that we might impute some degree of support in the ratings, which would lead to a higher rating than the combined U.S. entity would have on a stand-alone basis.
Under terms of the proposed deal, MetroPCS will declare a one-for-two reverse stock split, make a $1.5 billion cash payment to its shareholders and acquire all of T-Mobile's stock from parent DT by issuing to DT 74% of MetroPCS' common stock. DT's $15 billion of intercompany debt will also be rolled over into new unsecured notes at the combined company. In addition, the combined company will have $2.5 billion of MetroPCS bank debt, subject to waiver or refinancing, and $2 billion of unsecured notes, as well as $1 billion of new third-party debt.
We will evaluate the business and financial plans of the combined company, and the degree of support and strategic importance anticipated from majority owner DT to resolve the CreditWatch. The CreditWatch would likely remain in place until the transaction is completed, although we would expect to update our analysis with potential rating outcomes well in advance of the deal's closing and any new debt issuance. We will also reassess the recovery prospects for the existing debt at MetroPCS under the pro forma capital structure, including the additional value ascribable to the overall enterprise with the addition of the T-Mobile business.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- U.S. Telecom And Cable Companies' Maturities Are Manageable, But Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012
-- U.S. Telecom And Cable Companies, Strongest To Weakest, July 13, 2012
-- U.S. Telecom And Cable Ratings Should Be Stable Overall During Weak Economic Recovery, July 13, 2012
-- A Matter of Policy: U.S. Telecom Companies Maintain High Dividend Payouts, But For How Long?, May 30, 2012
-- A Matter of Policy: U.S. Cable And Satellite-TV Companies Ratchet Up Shareholder Payouts, May 16, 2012
-- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10, 2012
-- Assessing The Four-Notch Rating Gap Between The Two U.S. Direct-To-Home Satellite Video Operators, May 9, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Ratings List Ratings Placed On CreditWatch To From MetroPCS Communications Inc. Corporate Credit Rating B+/Watch Pos/-- B+/Stable/-- MetroPCS Wireless Inc. Senior Secured BB/Watch Pos BB Recovery Rating 1 1 Senior Unsecured B/Watch Pos B Recovery Rating 5 5
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)