T-Mobile And MetroPCS Seek Compatibility

A deal between T-Mobile, the No. 4 mobile carrier, and No. 5 MetroPCS could be announced as early as today if some “significant issues” are “finalized,” according to T-Mobile parent company Deutsche Telekom AG. So what do you get when you “combine two subscale struggling competitors?,” as Macquarie Securities analyst Kevin Smithen puts it. Not a “credible long-term competitor,” he tells the AP.

The deal would add 9.3 million subscribers to T-Mobile’s 33.2 million users -- a figure that has been slipping for eight quarters. The two top-ranking carriers, Verizon and AT&T, had more than 111 million and 105 million subscribers, respectively, as of June 30, according to Sanford C. Bernstein & Co. 

T-Mobile’s proposed acquisition by AT&T was scuttled in the face of a battle with federal regulators. Most stories indicated that this deal should breeze by regulators as it could bolster, rather than stifle, competition. It doesn’t help that, unlike all three of its leading competitors, T-Mobile doesn’t carry Apple iPhone line. Nor does MetroPCS. But naysayers see other problems with a pairing.

“We’ve said it before and we’ll say it again: Combining T-Mobile and MetroPCS -- two carriers with completely incompatible network technologies -- defies reason,” writes GigaOm’s Kevin Fitchard. “According to the financial media, the deal is set to happen, but it will be a disaster in the making.” 

Fitchard points out that T-Mobile is a GSM operator, and MetroPCS uses CDMA. Like different gauge railroad tracks, they are incompatible. Although, as other stories point out, both companies are converging on an LTE standard for faster 4G service, it may take years to make it meaningful operationally, he believes.

“Acquiring MetroPCS would mean that T-Mobile would have to essentially strip the smaller rival of spectrum and convert its customer base to its GSM-W-CDMA-LTE devices,” writes Tero Kuittinen in Forbes, pointing out that a similar dilemma poised by the Sprint-Nextel merger has proved nettlesome.

"A combined T-Mobile and MetroPCS would still be smaller than any of the bigger players (Sprint, AT&T, Verizon) [but] this does not fundamentally change the mobile operator landscape," Gartner analyst Brian Blau tells Arstechnica’s Cyrus Farivar. "[It’s] interesting in that the field becomes less crowded and the combined T-Mobile and MetroPCS could better compete given a stronger customer base."

Indeed, it’s a start. The No. 3 carrier Sprint, for one, with 56 million customers, is going to feel the pounding of hoofs at its heels. "Now Sprint is left at the altar and is facing what is almost certainly a more challenging industry structure," Sanford Bernstein analyst Craig Moffett tells the AP. 

Sprint’s “best remaining option to better compete with larger rivals AT&T and Verizon Wireless may be to buy Leap Wireless, according to Wall Street Access,” and reported by Bloomberg Businessweek’s Brooke Sutherland and Scott Moritz. “It certainly pushes them into a corner,” Wall Street Access’ Tom Burnett tells them. “You can’t be an orphan in this industry. You’ve got to try and save a place at the table, and there’s going to be some movement here.”

Besides acquiring airwaves that eventually will expand its network -- “even if that means being saddled with MetroPCS’s older system for a few years” -- Bloomberg Businessweek’s Olga Kharif divines a long-term benefit from a combination of the carriers that has more to do with financial strategy than anything else, making it all the more desirable to the German-based Deutsche Telekom. “The transaction also could turn Bellevue, Wash.-based T-Mobile into a publicly traded business, potentially making it easier to raise funds or be acquired by another company.”

How’s that? “The combined company could have a U.S. listed stock, which would give Deutsche Telekom a path to eventually sell down its equity in the subsidiary,” explains Anton Troianovski in the Wall Street Journal. Top executives from the companies were reportedly gathering in New York last night to hammer out the deal.

“Precise terms couldn't be learned,” Troianovski writes. “Deutsche Telekom said it would own a majority of shares in the combined company. MetroPCS shareholders could end up owning about 25% of the merged entity, two people familiar with the terms said.”

PC Mag’s Sascha Segan, meanwhile, can think of five reasons off the top of his head why the companies match up well. Three are technological and one has to do with the financial resources of T-Mobile parent Deutsche Telekom. But there’s also marketing. 

“Both MetroPCS and T-Mobile have been pushing low-cost 4G heavily, and both have strong presences in large cities,” Segan says. “A merger wouldn't be a shock to either company's user base or marketing staff, meaning that they'd be able to quickly build on the merged company's resources.”

The Wall Street Journal’s Miriam Gottfried, meanwhile, writes that it “makes sense for T-Mobile's parent, Deutsche Telekom, to bulk up in the U.S. with the deal. It would eliminate a low-cost competitor and give the combined companies 29.5% of the prepaid market, according to Sanford C. Bernstein.”

We’ll be keeping our ringers on for news as it develops today.

Tags: m&a, mobile, telecom
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