Since its merger with AT&T fell through due to antitrust concerns late in 2011, T-Mobile USA has been on the defensive. A new CEO and a planned merger with MetroPCS, however, could turn the tide.
In an interview with German weekly Manager Magazin to be published Oct. 19, T-Mobile USA CEO John Legere goes on the offensive: “I am very optimistic that we can overtake Sprint as the third largest service provider medium term.”
Legere, who was appointed CEO Sept. 19, is a 32-year veteran of the telecommunications industry who successfully restructured computer networking company Global Crossing after its bankruptcy in 2002. He emanates an air of optimism that was previously missing at T-Mobile, a subsidiary of German telecommunication giant Deutsche Telekom.
During a meeting with the Deutsche Telekom CEO Rene Obermann, Legere made it clear that he had no intention to oversee the German company’s exit from the U.S. business, according to Manager Magazin. “It is my goal to propel the business to a top position on the U.S. market,” he states confidently.
His bold statements represent a change of strategy at the German headquarters. Only in 2011, Deutsche Telekom tried to sell the company to AT&T for $39 billion, because of high debt, low growth, and low margins. Both companies ultimately scrapped the merger in December 2011, as it became clear that the FCC would block it on antitrust grounds.
According to analysts, T-Mobile lacks the scale to compete with giants such as Verizon and AT&T and shoulder large network upgrade costs by itself. AT&T and Verizon both have more than 100 million subscribers, whereas T-Mobile has only 33 million, according to Deutsche Bank estimates.
MetroPCS Merger Key to Overtaking Sprint
Shortly after the appointment of the can-do executive Legere, T-Mobile pulled a rabbit out of a hat and launched its full-on offensive to compete in the U.S. mobile market. On Oct. 3, it announced the merger with MetroPCS, the fifth largest wireless player with a customer base of 9 million.
Management of MetroPCS already approved the deal, in which T-Mobile USA will reverse merge with the publicly listed MetroPCS, but retain its brand name. Metro shareholders will receive $1.5 billion in cash from Metro’s balance sheet and 26 percent ownership in the new publicly traded company. Deutsche Telekom will retain the $15 billion in intercompany loans and receive a 74 percent ownership stake. T-Mobile declined to comment further on details of the merger.
The new company is expected to reap cost synergies of $6 million–$7 billion, a number large enough to justify a $4 billion network expansion project that will make it feasible to roll out the next generation LTE standard on most of its network. Metro shareholders will vote on the merger late in 2012.
New technology and scale will also make it easier to compete with Sprint, the No. 3 player, which has 57 million subscribers, but much lower margins—13.7 percent versus a combined 28.4 percent for T-Mobile and MetroPCS—according to Deutsche Bank.
Deutsche Bank comments favorably on the merger: “On our estimates the combination of T-Mobile US and MetroPCS could offer incremental value creation for [Deutsche Telekom] shareholders through cost synergies and possibly better execution of growth opportunities,” says a recent report.
John Legere said in a company press release: “The combination with MetroPCS is another logical and significant step that will accelerate our Challenger Strategy” and later told Manager Magazin that in his opinion the Sprint network is “so much worse.”
Softbank Taking Over Sprint Could Jeopardize Deal
Everything seemed to be going smoothly for T-Mobile, but on Oct. 15 events unfolded that could threaten a successful merger with Metro, which was supposed to close in the first half of 2013.
Japanese mobile phone operator Softbank announced its intention to acquire 70 percent of Sprint for $12.1 billion in cash and 30 percent in shares of the new company. According to a press release, this will provide Sprint with $8 billion in new capital, enough cash to launch a counter bid for MetroPCS.
According to a report by the Statesman Sentinel, Sprint is waiting for the proxy filing of the T-Mobile negotiations with Metro, which are normally released after one or two months. Once Sprint learns about the deal metrics, it can weigh a counter offer.
John Legere, however, remains optimistic in his interview with Manager Magazin: “I am not afraid of a counter offer. Our offer for the MetroPCS shareholders is very attractive.” Even in the case of the merger not going through, the CEO holds on to his vision. “Our strategy to move aggressively will be successful in any event.”
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