Ina Fried

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Deutsche Telekom, MetroPCS Discuss Merger Plans

Minutes after announcing their deal to combine U.S. operations, Deutsche Telekom and MetroPCS held a conference call.

Here’s a recap of the call:

6:10 am: Deutsche Telekom CEO Rene Obermann is discussing the background that led to the deal.

“With this combination, we form the leading value carrier in the U.S. market,” he said, adding that it will also give the combined company the spectrum position it needs to roll out LTE.

$6 billion to $7 billion in cost synergies.

6:11 am: Technically, it is a reverse merger, with U.S.-listed MetroPCS doing the acquiring, though Deutsche Telekom will be the controlling party, with a 74 percent stake in the company.

6:12 am: DT will nominate members of the board.

A vote of MetroPCS shareholders will take place late this year or early next year, with the deal expected to close in the first half of next year, Obermann said.

6:15 am: John Legere, newly appointed T-Mobile USA CEO, will head the combined company.

Obermann says the deal is like an accelerated IPO with additional benefits.

6:16 am: Now up, MetroPCS CEO Roger Linquist, talking about the rationale from his perspective.

Many partnerships and alternatives have been considered in recent months and years.

“We are very well aware of the opportunities in our industry,” he said.

The deal will give the combined company a better opportunity to compete on a national scale, and will give shareholders cash and a stake in the new company.

6:20 am: Lots of pleasantries so far, but no talk yet of the challenges — different technologies, business strategies, etc.

6:21 am: T-Mobile CEO John Legere now talking up the deal.

It’s important that the team be unified from Day One, Legere said, in discussing the management of the new team.

MetroPCS CFO J. Braxton Carter will be CFO of the combined company, with the current chief operating officers of each company heading that unit’s operations.

Simplicity, unlimited data and “no surprises” will be the strategy for both contract and non-contract customers.

“T-Mobile has been very busy over the last 10 months,” Legere said, referring to acquiring spectrum from AT&T after that deal fell apart, spectrum acquisition from Verizon, and a deal to lease its cellular towers.

Combined with the MetroPCS spectrum, T-Mobile has almost 40 percent more spectrum than it had a year ago.

6:27 am: The deal will give T-Mobile 42 million subscribers, up from 33 million currently, narrowing the gap between it and No. 3 player Sprint.

“I believe T-Mobile is well on its way to delivering on the promises of its Challenger strategy,” Legere said, adding that the deal will only further that.

A key component of that, Legere said, is the effort to rejigger the network to support a more commonly used (a.k.a. iPhone compatible) piece of spectrum.

T-Mobile only has about 5 percent of the business-to-business market, an area for growth. The company is also working to make sure its costs line up better with its market position.

Among other things, Legere said, the deal “removes any doubts about whether we are here to stay.”

6:30 am: For the customer, Legere said the deal will enable more bars of signal in lots of places.

6:31 am: Here’s a look at how the company’s spectrum position will improve in key areas:

6:31 am: The strategy will be to converge on a single LTE network. (The companies use vastly different network technologies today.)

T-Mobile uses GSM technology, while Metro PCS uses CDMA — the technology used by Verizon and Sprint.

Legere noted that this has been a concern.

“People think the integration will be difficult,” he said. But, no, Legere insists.

“This is not a replay of a debacle that people have seen in the past,” he said. “We will not smash together two networks with differing technologies.”

Customer losses, he insists, will be minimal. By the end of 2015, the company expects to shut down the existing MetroPCS network after transitioning all customers.

6:36 am: Over time, T-Mobile will use MetroPCS’s CDMA spectrum for LTE service.

6:37 am: As for customer benefits, Legere said MetroPCS customers will get a better network, including international roaming.

“MetroPCS customers who move out of footprint will no longer need to change carriers,” Legere said. (MetroPCS is only in a portion of the U.S., compared to the fully national carriers.)

Prepaid is a big growth area, Legere said.

Here’s a chart that shows where MetroPCS, T-Mobile and the combined company stack up in the prepaid space:

6:40 am: Legere said that T-Mobile has had an “overhang” from customer concerns about whether the company was here to stay. (T-Mobile has been shedding contract customers in recent months.)

“This is a very powerful statement about that,” Legere said.

6:41 am: Now up, MetroPCS CFO J. Braxton Carter.

The deal will allow the MetroPCS brand to expand to new areas, allow significant savings in capital spending, and other cost savings.

“We are confident in our ability to make this transition seamless,” Carter said.

Here’s a chart that illustrates, at least generally, where T-Mobile thinks it can find that $6 billion to $7 billion in cost savings:

6:45 am: Of course, Carter notes, there will be some one-time costs associated with the combination.

6:46 am: Carter notes that the company will have the kind of financial position and balance sheet it needs, along with access to capital markets. The company is hoping for a debt rating of BB to BB- (I’m no bond expert. I think that means it can get into a decent state school.)

Total debt for the combined company is projected to be 20.4 billion, with cash of $1.8 billion.

6:50 am: Prepared remarks wrapping up with Legere, and then we should be on to Q&A.

6:50 am: Another synergy? Legere says combined company will be “cooler.”

Okay, Q&A time.

6:50 am: First question is on Deutsche Telekom’s plans for continued long-term ownership, as well as how the company expects to grow revenue and earnings at the same time.

On the first point, Obermann said the U.S. market is more attractive than Europe, in particular the prepaid market.

Carter notes that one plan to grow revenue is the expansion of the MetroPCS brand to new areas.

6:57 am: T-Mobile CTO Neville Ray is now talking about the company’s network plans.

He’s talking nerdy talk about which of MetroPCS cell sites will be kept and which can be discontinued.

“Most of the macro sites can be decommissioned over a very short period of time,” he said.

LTE network was due to come on next year for T-Mobile, which Ray said is “perfect timing” for this deal.

6:59 am: MetroPCS plans to start selling HSPA+ (T-Mobile’s network) handsets available to customers on Day One after the deal closes.

7:00 am: When does T-Mobile expect to stop losing contract customers, and how important is the iPhone to that?

Legere: Clearly the postpaid (contract) business is critical. The pre-deal plan was to stabilize that in 2013 and grow the following year, Legere said.

Legere said it is the company’s goal to have a full spectrum of devices, but he didn’t comment on actually getting the iPhone. Legere did highlight the company’s bring-your-own iPhone strategy.

Also, T-Mobile will launch LTE in an industry-standard piece of spectrum. (One of the issues in getting an iPhone has been that T-Mobile has been operating in a relatively unique band of spectrum.)

7:05 am: Legere said the company is well aware of both its strengths and its challenges. “We know why we have had difficulties.”

Legere said that the company will eventually have a better LTE experience than its rivals, something it couldn’t always say. So much so, that he said at some point in time it expects to be able to “taunt” rivals over the experience.

Legere said LTE network will be a “smoking differentiator” between T-mobile and its competitors.

7:11 am: One question didn’t come through clearly. Executives quipped that clearly the analyst wasn’t using a T-Mobile or MetroPCS phone.

7:12 am: By the way, here’s a map of the company’s relative coverage areas:

7:15 am: Apparently, the question that got lost was about how the company plans to go from decreasing revenue to annual growth of 3 percent to 5 percent.

Legere highlighted the business-to-business area and growth in so-called MVNOs (companies that sell their own service using T-Mobile’s network).

And the same caller gets dropped again.

7:17 am: Is the sale of an iPhone baked into the plans?

Legere: I really just want to talk about this deal, and not any other active or speculated discussions. “I apologize, but that’ll have to do for today.”

7:19 am: Any breakup fees?

There is a breakup fee if either party drops the deal. One way, it is a $250 million fee, and the other is $150 million, but it wasn’t totally clear which way was which.

Legere: Both parties here are extremely committed.

7:19 am: And that’s it.


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