Moody's: Merger of T-Mobile USA and MetroPCS Credit Positive for Deutsche Telekom
Moody's Investors Service has said that it views as credit positive for Deutsche Telekom the announcement by the company and MetroPCS Communications that they plan to merge T-Mobile USA and MetroPCS Wireless.
Although credit positive, the announcement is ratings neutral for Deutsche Telekom. However, the announcement has triggered a rating review for upgrade for MetroPCS Communications.
The combination of MetroPCS and T-Mobile will create a mobile operator with approximately $25 billion in revenues and 42.5 million subscribers. Deutsche Telekom, the owner of T-Mobile, will hold 74% of the combined company's shares, while MetroPCS's shareholders will hold the remaining 26% and receive a cash payment of $1.5 billion.
The transaction, which is a reverse takeover of MetroPCS by T-Mobile, is expected to be completed in the first half of 2013, pending MetroPCS shareholder approval and a number of US regulatory approvals.
The financial implications for Deutsche Telekom, if the transaction is completed, include an assumption of some $5.5 billion in debt plus some $2 billion of adjustments to be added to the reported debt due to operating leases, which will be mitigated by an additional lease adjusted EBITDA contribution of approximately $1.8 billion and the fact that MetroPCS's existing network will be gradually phased out through 2015, and substituted by a new LTE network. The resulting negative effect on Deutsche Telekom's leverage is expected to be manageable and offset by the enhanced strength of the combined business and the potential achievement of synergies and cash flow growth.
Deutsche Telekom will provide a $5.5 billion backstop for the new entity's term loan, unsecured notes and the $1.0 billion in external debt that will result from the latter's planned bond issuance, as well as provide a $500 million revolving credit facility after the deal closes. Deutsche Telekom will also roll over $15 billion of existing intercompany debt at T-Mobile, resulting in total debt at the new entity of approximately $20.5 billion (excluding Moody's standard adjustments, capital leases and T-Mobile tower leasing obligations).
Assuming all regulatory approvals are obtained, the transaction will create a larger mobile company in the US (42.5 million customers versus 33.2 million prior to the deal). Although the resulting entity will still be competitively disadvantaged because it will remain smaller in terms of customer numbers than Verizon Communications, Inc. (A3 stable; approximately 92 million customers), AT&T Inc. (A2 stable; approximately 103 million), and Sprint Nextel Corporation (B1 stable; approximately 55 million), it will be better positioned in terms of scale and scope to tackle the market under T-Mobile's challenger strategy.
The resulting entity will have a greater share in the US mobile prepaid market, with some 15 million customers, and a stronger competitive position. It will also be better positioned to drive future growth, have deeper network coverage with greater spectrum and a clear-cut technology path to one common long-term evolution (LTE) network. The combined company, which will retain the T-Mobile name and brand, will have a more expanded scale, spectrum and financial resources to aggressively compete with the other national US wireless carriers.
However, the transaction presents a number of challenges, including significant integration risk as there is a need to migrate all MetroPCS customers to an LTE network over the next three years, given that the existing technologies of T-Mobile and MetroPCS are not compatible. MetroPCS uses CDMA technology, while T-Mobile relies on the GSM for voice and HSPA+ for data. Ultimately, though, both companies expect to converge towards the LTE technology standard to offer 4G standards.
There is also a risk of higher churn rates during the integration process, which competitors will seek to exploit. However, once the network migration is completed, the common LTE-based technology for both companies will support a strong 4G network. Substantial synergies, mainly in procurement and operating cost optimisation, will contribute to cash flow growth.