Regulators likely to smile on merger of T-Mobile and MetroPCS

T-Mobile USA and MetroPCS (NYSE:PCS) expect to close their planned merger sometime in the first half of next year. Standing in the way of the transaction are the FCC and the Department of Justice, which worked to kill AT&T's (NYSE:T) attempt to purchase T-Mobile last year in a $39 billion deal.

The transaction is structured as a recapitalization, in which MetroPCS will declare a 1 for 2 reverse stock split, make a cash payment of $1.5 billion to its shareholders and acquire all of T-Mobile's capital stock by issuing to Deutsche Telekom 74 percent of MetroPCS' common stock on a pro forma basis. DT also will roll its existing intercompany debt into new $15 billion senior unsecured notes of the combined company, thereby providing the combined company with a $500 million unsecured revolving credit facility and a $5.5 billion backstop commitment. The post-merger company will operate under the T-Mobile brand under the leadership of current T-Mobile CEO John Legere. It will serve 42.5 million U.S. subscribers and projects 2012 pro forma revenues of $24.8 billion.

It's unclear exactly how regulators will react to the combination of T-Mobile (the nation's fourth largest wireless carrier) and MetroPCS (the nation's sixth largest wireless carrier), but it appears that the transaction might have a better chance of succeeding than AT&T's purchase of T-Mobile. According to the Wall Street Journal, a source close to the FCC said a merger between T-Mobile and MetroPCS would be approved relatively quickly--likely because the combination involves a struggling national player (T-Mobile) and a regional player (MetroPCS) instead of a massive national carrier (AT&T) expanding its reach with the acquisition of another national player.

Executives from MetroPCS and T-Mobile parent Deutsche Telekom said they expect to receive regulatory approval for the deal, which would create a carrier that ranks as the nation's fourth largest player, just behind Sprint Nextel (NYSE:S).

When AT&T announced its plans to acquire T-Mobile, the company predicted it would receive approval from the FCC and the DoJ. However, a range of players worked for months to convince regulators that the combination of AT&T and T-Mobile would stifle competition in the market by creating a carrier with too much market power. For its part, AT&T argued the combination would provide it with needed spectrum and would result in better coverage for customers.

The DoJ eventually sued to stop the AT&T and T-Mobile merger, which forced AT&T to drop its bid to acquire T-Mobile in December.

However, after regulators killed AT&T's acquisition bid, they agreed to approve Verizon Wireless' (NYSE:VZ) $3.9 billion purchase of AWS spectrum from a group of cable companies. Verizon helped push that deal through by agreeing to swap spectrum with T-Mobile and Leap Wireless (NASDAQ:LEAP) and to auction off some of its 700 MHz spectrum.

Further complicating T-Mobile's merger with MetroPCS is the FCC's plan to re-evaluate how much spectrum a carrier should be able to hold. The FCC's rulemaking will explore the agency's so-called spectrum-screen, which it uses when reviewing spectrum transactions. If a carrier acquires too much spectrum and violates the screen, the deal is more closely scrutinized. Currently, the screen is different for each proposed transaction. It's unclear whether the FCC will have completed its review of the spectrum screen in time to apply it to T-Mobile's merger with MetroPCS.

For more:
- see this WSJ article (sub. req.)
- see this New York Times article

Special Report: T-Mobile USA and MetroPCS merge: Complete coverage

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