Report: Deutsche Telekom may try to merge T-Mobile with MetroPCS

NEW ORLEANS--T-Mobile USA parent Deutsche Telekom is holding talks over a merger between T-Mobile and prepaid player MetroPCS (NYSE:PCS ) as it reviews its options for the company, according to a Bloomberg report.

The report, which cited unnamed sources familiar with the matter, said Deutsche Telekom is considering a stock-swap transaction that would give it control over the combined entity, which would be publicly listed. Deutsche Telkom is also considering an initial public offering or an outright sale of T-Mobile USA, the report said, adding that Deutsche Telekom is also in talks with other companies.

MetroPCS shares jumped as much as 29 percent and were up 17 percent to $7.68 in afternoon trading in New York on Wednesday. T-Mobile reports first-quarter earnings Thursday and is likely to be asked about the report.

Deutsche Telekom, MetroPCS and Sprint declined to comment, according to Bloomberg.

The report comes at a curious time, especially considering the major $4 billion investment DT is making to upgrade T-Mobile's network and launch LTE service. Ericsson (NASDAQ:ERIC) and Nokia Siemens Networks were just announced as T-Mobile's primary infrastructure vendors for the upgrade. T-Mobile will formally launch LTE next year as part of a $1.4 billion investment T-Mobile parent Deutsche Telekom is making this year and next year; the investments will total $4 billion over time.

T-Mobile has been struggling to hold onto postpaid customers, but it has said its prepaid business has doubled over the past year. T-Mobile has been hampered by its inability to sell Apple's (NASDAQ:AAPL) iPhone; Apple currently does not support the 1700 MHz AWS spectrum T-Mobile uses for HSPA+ services. T-Mobile has said by year-end it will it will begin offering HSPA+ support for unlocked iPhones on its network as it refarms its 2G PCS 1900 MHz spectrum. Currently, customers who bring unlocked iPhones to T-Mobile can only get 2G EDGE data speeds.

A merger between T-Mobile and MetroPCS would be complicated. Though they both use AWS spectrum, MetroPCS is a CDMA carrier while T-Mobile uses GSM technologies. MetroPCS has launched LTE service and counts 580,000 LTE subscribers, or around 6 percent of its subscriber base of roughly 9.48 million.

Some analysts blasted the proposed combination. "And so we go around and around, proposing combinations of companies, much like the children's books with the top and bottom halves of pages that allow for any number of improbable and ultimately unsightly combinations," wrote Sanford Bernstein's Craig Moffett, according to the Wall Street Journal. "A zebra bottom and giraffe top. Or a baby's head on a monkey's body. Our children laugh simply because it's such an ugly baby."

In February multiple reports indicated that Sprint Nextel's (NYSE:S) board rejected a proposal to acquire MetroPCS. The reports said Sprint would have offered MetroPCS shareholders stock and a small amount of cash, and the purchase price was to represent a 30 percent premium over MetroPCS' share price. Multiple reports said the deal would have valued MetroPCS at $8 billion.

For more:
- see this Bloomberg article
- see this WSJ article (sub. req.)

Related Articles:
Report: Sprint board nixes MetroPCS acquisition at the last minute
T-Mobile takes aim at AT&T's iPhone in new ad campaign
T-Mobile's Ray: Tower sale could take months, just getting started
T-Mobile picks Ericsson, NSN as its LTE vendors
T-Mobile: Prepaid 'has doubled over the past year'

Article updated May 10 with analyst commentary.

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