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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

October 3, 2012 at 7:23 AM

With T-Mobile / MetroPCS deal, Puget Sound lands another giant

T-Mobile USA finally found a dance partner.

The Bellevue-based company today confirmed that it’s merging with Dallas-based MetroPCS in a deal that will speed T-Mobile’s rollout of a 4G LTE network and strengthen the bargain section of the wireless market.

It will take a few years to see whether the merged company overtakes Sprint and poses a major challenge to AT&T and Verizon Wireless.

T-Mobile HQ (2).jpg

T-Mobile customers won’t be affected much, other than quicker access to a wider LTE network after the deal closes sometime next year. MetroPCS customers will be encouraged to migrate to T-Mobile’s network by the end of 2015, which will enable the merged company to use common network technology.

But in the meantime a tremendous change will take place in the Puget Sound region, where there’s suddenly another giant public company. The merged company will be headquartered in Bellevue and have $24.8 billion in annual sales.

To put that in perspective, by sales the company is more than twice the size of Starbucks or Nordstrom. It will be the state’s fourth largest public company behind Costco, Microsoft and Amazon.com. (It would be the fifth if you count Boeing, which is now based in Chicago.)

This won’t replace the loss of Washington Mutual or Safeco but it will help, especially since the deal solidifies the concentration of wireless employment in the region at a time when the industry’s surging and — with LTE technology — building a new foundation for the technology industry.

The deal makes T-Mobile a more autonomous, U.S.-based company traded on the New York Stock Exchange. That’s a long-term enterprise and ends the uncertainty that hung over T-Mobile as a subsidiary of Germany’s Deutsche Telekom, especially since DT began shopping it around.

From this angle, the MetroPCS merger is a far better deal than last year’s attempt to sell T-Mobile to AT&T, which would have shifted the corporate headquarters to Texas.

That’s not to say there won’t be some pain. T-Mobile is saying it expects to find $6 billion to $7 billion in cost savings through the merger with MetroPCS, which means there will be job cuts across the companies.

At the same time, the new T-Mobile believes it’s positioned to grow and win a larger share of the U.S. wireless market, which would lead to continued expansion in Bellevue.

“This combination of T-Mobile USA and MetroPCS means we are here to compete,” Deutsche Telekom Chief Executive Rene Obermann said on a conference call this morning. “We are here to unlock value and we are here to win. This deal has the potential to be a game changer.”

The deal was announced today after it was approved by the boards of DT and MetroPCS. It still needs regulatory approval, but the companies believe it could be finalized in the first half of 2013. It’s not likely to raise the same competition concerns as AT&T’s attempt to merge with T-Mobile, which was scuttled after drawing antitrust scrutiny.

T-Mobile is the fourth largest wireless carrier and MetroPCS is the fifth. Together they’ll still trail third-place Sprint, but it’s a much closer race.

Today’s deal is structured as a recapitalization of Dallas-based MetroPCS. MetroPCS is splitting its stock and paying shareholders a one-time dividend of $1.5 billion, or about $4.09 per share. DT is getting 74 percent of MetroPCS common stock, rolling in $15 billion in debt and providing $500 million in revolving credit to the combined company. It’s also providing a $5.5 billion backstop for previous deals made by MetroPCS.

Combined, the companies are expected to have 42.5 million subscribers this year and $6.3 billion of earnings before interest, taxes and depreciation. It’s expecting to spend $4.2 billion on capital expenditures — mainly building out its network — and have $2.1 billion in free cash flow.

DT will end up with 74 percent of the combined company and MetroPCS shareholders will hold 26 percent.

Employees of T-Mobile – including nearly 5,000 in the Puget Sound region – may benefit from stock grant programs.

T-Mobile’s new chief executive, John Legere, said being public will enable the company to offer more competitive compensation programs to attract and retain employees. A plan for stock awards hasn’t yet been formulated but he favors the approach.

“We can use ownership in our company to motivate employees,” he said in an interview.

Legere will lead the combined company that will be called T-Mobile. J. Braxton Carter, vice chairman and chief financial officer of MetroPCS, will become CFO of T-Mobile.

T-Mobile and MetroPCS customers will continue to be served separately, at least until MetroPCS customers are upgraded to T-Mobile’s network by the end of 2015. Jim Alling, a Starbucks veteran and current chief operating officer of T-Mobile, will lead T-Mobile’s customer unit while Thomas Keys, MetroPCS president, will lead MetroPCS’s customer unit.

Although it will be headquartered in Bellevue, the combined company will “retain a significant presence” in Dallas, its release said.

In a conference call, Legere said the merger will provide T-Mobile with a 40 percent increase in contiguous spectrum for LTE and provide particularly dense coverage in major metro areas such as New York and Los Angeles.

Addressing concerns about the different network technologies used by MetroPCS and T-Mobile, Legere said they will not attempt to mash the older, legacy networks together. Instead, they’ll move MetroPCS customers using its older CDMA network onto T-Mobile’s network as they renew and upgrade. T-Mobile’s current, HSPA Plus network has capacity to accomodate MetroPCS subscribers, he noted.

The networks’ incompatibility will soon be a moot question. Both companies were in the process of shifting their networks and eventually customers to the same LTE technology that’s becoming the new industry standard.

Legere said they expect “a rapid migration” to LTE “as part of the normal upgrade cycle.”

As for its pricing strategy, the new T-Mobile will continue to emphasize value, with unlimited 4G plans. It’s also going to be the largest provider of non-contract wireless phone services.

“We’ll be able to deliver the best value across the board and that means in both contract and no-contract offerings,” he said.

It’s natural for this to happen here. The modern wireless industry was born in the area, with McCaw Cellular establishing the first national, roaming network in 1990. Two years later McCaw began selling the company to AT&T, beginning decades of mega mergers of the region’s wireless companies.

That generated wealth and insight that led to the founding of Western Wireless in 1994. It became VoiceStream, which was sold to Deutsche Telekom in 2001.

Comments | Topics: 4G, deal, LTE

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