T-Mobile and MetroPCS agreed Wednesday to combine their struggling cellphone businesses with the aim of competing better with their three larger rivals.
The merged company will use the T-Mobile brand and have 42.5 million subscribers, closer to but still short of the 56.4 million subscribers at No. 3 Sprint Nextel Corp. based in Overland Park.
Reports of the merger talks had punished shares of Sprint on Tuesday, but the stock regained its lost ground and a bit extra after the news became official. Sprint shares rose 30 cents, closing at $5.20 Wednesday, erasing Tuesday’s 28-cent loss.
Sprint shares also got a boost from favorable mentions by two analysts.
CitiGroup analyst Michael Rollins already liked Sprint but added that he expected its stock to outperform MetroPCS shares in the next few months, according to Bloomberg News.
Nomura Equity Research’s report reaffirmed analyst Mike McCormack’s buy rating on Sprint shares and said he saw its exclusion from the deal as positive. It keeps Sprint management’s attention focused on the key job of network upgrade and “internal improvement.”
Analyst Craig Moffett at Sanford C. Bernstein Co. had said Sprint might be interested in a “hostile” counter offer for MetroPCS.
The merger agreement includes a breakup fee of $150 million should MetroPCS back out, and $250 million should T-Mobile back out. Moffett indicated those terms seemed to limit “but not preclude a Sprint overture.”
Though post-merger T-Mobile will stay No. 4 among U.S. wireless companies, it will gain access to more space on the airwaves, a critical factor as cellphone carriers try to expand their capacity for wireless broadband service.
T-Mobile USA’s German parent, Deutsche Telekom AG, will hold a 74 percent stake in the combined business, while MetroPCS Communications Inc.’ shareholders will own the rest. MetroPCS shareholders also will receive a payment of about $1.5 billion.
Both companies have struggled in the highly competitive U.S. cellphone market led by Verizon Wireless and AT Inc., each with more than 100 million subscribers.
T-Mobile has 33.2 million subscribers and MetroPCS has 9.3 million, ranking fifth.
Getting more access to airwaves was the main reason AT tried to buy T-Mobile for $39 billion last year. But that deal was shot down by regulators’ concerns that competition would suffer.
T-Mobile-MetroPCS is expected to have revenue of $24.8 billion. The deal is also expected to lead to $6 billion to $7 billion in combined savings.
The deal still faces approval from shareholders of both companies and from government agencies. But the regulatory concerns this time appear mild. Both companies are relatively small, and T-Mobile USA has been losing subscribers for the last two years.
“We are committed to creating a sustainable and financially viable national challenger in the U.S., and we believe this combination helps us deliver on that commitment,” Deutsche Telekom CEO Rene Obermann said in a statement.
U.S. Rep. Anna G. Eshoo, the ranking Democrat on the House subcommittee on communications and technology, said there’s a big need for a “strong national competitor” in the wireless marketplace when two companies – Verizon Wireless and AT – dominate the space.
“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,” she said. “I hope the FCC and the Department of Justice will conduct a thorough but swift review of the transaction’s merits.”
Even if not stalled by regulatory hurdles, a linkup would nonetheless be complicated by MetroPCS and T-Mobile using different network technologies. That means MetroPCS phones would not work on T-Mobile USA’s network, and vice versa. But both companies are deploying the same fourth-generation, or 4G, technology.
Obermann said the new company will have the “resources to expand its geographic coverage, broaden choice among all types of customers and continue to innovate, especially around the next-generation LTE network.”
Neither T-Mobile nor MetroPCS carry Apple Inc.’s iPhone, and it’s unclear whether the combined company will. AT, Verizon and Sprint all do.
Germany’s stock market was closed Wednesday because of a national holiday. But the prospect of Deutsche Telekom finding a solution for its struggling U.S. business sent the stock higher Tuesday.Mark Davis of The Star’s business staff contributed.