Sprint Nextel Corp. (S), the third- largest U.S. mobile-phone carrier, is in the early stages of evaluating a counteroffer for MetroPCS Communications Inc. (PCS) to top Deutsche Telekom AG (DTE)’s bid to combine it with T-Mobile USA, said three people familiar with the matter.
MetroPCS shares rebounded as much as 17 percent from their low today on the Bloomberg News report, and were temporarily halted after triggering a stock exchange circuit breaker. They were down 2 percent at $11.99 at 12:50 p.m. in New York. Sprint initially reversed losses before falling 4 percent to $4.99.
Sprint is crunching the numbers and holding talks with its advisers to weigh the feasibility of a higher offer, said the people, who asked not to be identified because the talks are private. The Overland Park, Kansas-based company could decide as early as next week whether to pursue an offer, two of the people said.
Deutsche Telekom, Germany’s biggest phone company, announced plans yesterday to merge its T-Mobile division with MetroPCS, after Bloomberg News first reported the story. The move would create a bigger rival to compete with market leader Verizon Wireless and Sprint. While Sprint Chief Executive Officer Dan Hesse has said his firm will play a role in industry consolidation, a tie-up between MetroPCS and T-Mobile will limit Sprint’s takeover options, according to Stifel Financial Corp.
Scott Sloat, a Sprint spokesman, declined to comment on whether the company is evaluating potential counterbid options. Deutsche Telekom spokesman Andreas Fuchs declined to comment on a potential bid by Sprint. Drew Crowell, a spokesman for MetroPCS, didn’t immediately return a request for comment.
MetroPCS stock will effectively trade as a proxy for the combined entity until the deal closes, at which point its ticker may change, said one of the people familiar with the situation. Sprint has not yet approached MetroPCS, the person said.
One issue that may hinder a counteroffer from Sprint is the break-up fee, said one of the people. John Legere, who was named as chief of Deutsche Telekom’s U.S. unit last month and will head the merged company, said this week that if T-Mobile backs out of the deal, the company would owe MetroPCS $250 million. The reverse breakup fee MetroPCS would pay is set at $150 million.
Deutsche Telekom is prepared for a potential counterbid from Sprint and would consider better terms if necessary, according to another person familiar with the matter.
The value of the joint company may be derived from the price of MetroPCS shares, which would account for 26 percent of the whole entity and closed at $12.24 in New York yesterday.
Based on that price and excluding expected dividends, the Richardson, Texas-based company’s equity may be priced at about $3 billion, implying an equity value of $11.4 billion for the combined company excluding liabilities, according to data compiled by Bloomberg. Accounting for joint net debt of $21.4 billion, the enterprise value would total about $32.8 billion.
Deutsche Telekom CEO Rene Obermann is trying to rejuvenate T-Mobile, the fourth-largest U.S. carrier, more than a decade after the German company entered the American market. The combined entity would have sales of $24.8 billion and 42.5 million subscribers, still less than Sprint.
Sprint may be so disadvantaged by the combination that it would have to make a counteroffer, Sanford C. Bernstein analyst Robin Bienenstock said in a note to investors.
The company abandoned plans earlier this year to buy MetroPCS after Sprint’s board rejected the transaction, which may have cost as much as $8 billion including debt, two people familiar with the plan said in February.
Sprint shares have more than doubled since the end of February when it dropped plans to buy MetroPCS. Within the same period, MetroPCS shares are almost unchanged, which could make a share purchase more appealing. MetroPCS currently has a market value of $4.35 billion while Sprint is valued at about $15 billion.
Sprint was talking to Deutsche Telekom about a deal with T- Mobile even as the German company was also considering buying Leap Wireless International Inc. (LEAP), and before Deutsche Telekom decided to merge T-Mobile with MetroPCS, three people with knowledge of the situation said. Leap spokesman Greg Lund declined to comment on the talks.
The German company started talking with MetroPCS, based in Richardson, Texas, and other potential partners soon after its agreement to sell T-Mobile to AT&T Inc. (T) failed in December because of regulatory obstacles, said the people, who asked not to be identified because the process was private. The talks with MetroPCS accelerated after it reported better than expected second-quarter earning on July 26, the same people said.
Sprint had already held earlier discussions with Deutsche Telekom about buying T-Mobile prior to the March 2011 announcement that AT&T offered to acquire the unit for $39 billion, people with knowledge of the matter said at the time.
By Aaron Kirchfeld, Serena Saitto and Scott Moritz
Courtesy of Bloomberg News