Deutsche Telekom/T-Mobile, MetroPCS expect 'strong,' 'flexible' balance sheet from combination

By Paul Deckelman

New York, Oct. 3 - The planned combination of U.S wireless operators T-Mobile USA and MetroPCS Communications, Inc. announced Wednesday will create a larger, better-funded industry competitor that will have ample spectrum capacity as well as what executives of the two companies variously termed a "strong" and "flexible" balance sheet to provide for its funding needs as it continues building out its next-generation LTE network.

The new company being formed will retain the name of Bellevue, Wash.-based T-Mobile, currently the fourth-largest U.S. wireless carrier after industry giants Verizon Wireless, AT&T Mobility LLC and No. 3 operator Sprint Nextel Corp.

Loans roll over into notes

It will have about $20.4 billion of total debt, not counting tower leasing and other capital lease obligations. Figuring in $1.8 billion of cash on the balance sheet when the deal closes, net debt is projected at $18.6 billion, with T-Mobile's current corporate parent, German communications giant Deutsche Telekom AG, to be the new company's largest debtholder as well as its largest equityholder with a 74% stake.

Richardson, Texas-based MetroPCS' vice chairman and chief financial officer, J. Braxton Carter - who will become the CFO of the new combined company - said on a conference call with analysts outlining the details of the complex transaction that the capital structure will consist largely of $15 billion of existing intercompany loans between Deutsche Telekom and T-Mobile. The parent will roll these over into new T-Mobile senior notes with an average tenor of 8.5 years and a projected weighted average yield of 8%.

Deutsche Telekom will also provide a $500 million revolving credit facility, which will be undrawn at the time of the closing, and will provide a $5.5 billion backstop commitment for all existing MetroPCS debts plus $1 billion of new third-party financing.

The bank debt portion of MetroPCS' existing capital structure consists of $2.5 billion of variable term loan with a weighted average yield of 4.6%. Of that, $1 billion is due in 2016 and $1.5 billion in 2018. There is also a $100 million revolving credit line due in 2016 that is currently undrawn. Carter said the company would obtain a waiver or refinance that bank debt.

The company also has outstanding $1 billion of 6 5/8% notes due 2020 and $1 billion of 7 7/8% notes due 2018, which Carter said would be retained in the new company's capital structure.

The company will also have $2.8 billion of obligations related to leasing space on communications antenna towers owned by other companies.

Looking for synergies

Deutsche Telekom and MetroPCS estimate that the new T-Mobile's 2012 pro-forma EBITDA will total $6.3 billion, with about $900 million of anticipated run-rate cost synergies, working out to a total debt-versus-EBITDA leverage ratio of 2.9 times, and net leverage of 2.6 times.

Carter said that the new T-Mobile would likely have a credit rating in a range of BB- to BB, while Deutsche Telekom would maintain its investment-grade rating of BBB+.

John Legere - currently the president and chief executive officer of T-Mobile, who is slated to assume those offices with the new company - declared during the conference call that "even after this transaction," the new T-Mobile's net debt ratios "are competitive or still better than the rest of the industry." He said that this factor, combined with the fact that the new T-Mobile will become a public company with direct access to both the equity and debt capital markets, "will allow us to either tap internal capital if we need to or external financing."

He said that, in turn, "puts us in very good stead - better stead than we were before" in terms of being able to get needed financing as it expands its next-generation network to compete with its larger rivals.

The new company will combine the existing T-Mobile's 33 million mostly postpaid, or regular monthly contract subscribers, with MetroPCS' 9.5 million prepaid subscribers, who purchase their service on an as-needed, pay-as-you go basis. That 42.5 million pro forma subscriber base will still leave the combined company in fourth place, subscriber-wise, but gaining on its nearest rival, Sprint. The latter company, based in Overland Park, Kan., is the No. 3 player nationwide with about 57 million total subscribers at the end of the second quarter - 32.5 million postpaid, 15.4 million prepaid and 8.4 million wholesale and affiliate subscribers, all of whom utilize the Sprint platform.

Both of those carriers, though, trail badly against the industry leaders, Basking Ridge, N.J.-based Verizon Wireless, which claims the top spot with over 108 million customers, and Atlanta-based AT&T Mobility, which reports about 103 million.

A complex transaction

Under the terms of the transaction announced on Wednesday, the deal is structured as a recapitalization in which MetroPCS will declare a 1 for 2 reverse stock split, make a cash payment of $1.5 billion to its shareholders of $4.09 per share prior to the split and acquire all of T-Mobile's capital stock. It will do this by issuing 74% of its own stock to Deutsche Telekom on a pro forma basis.

The executives on the call said the new T-Mobile is expected to have $24.8 billion of revenue, $6.3 billion of adjusted EBITDA, $4.2 billion of capital expenditures and $2.1 billion of free cash flow (defined as EBITDA less capital expenditures) in 2012 pro forma for the transaction.

Deutsche Telekom's CEO, Rene Obermann, said on the call that he is anticipating between $6 billion and $7 billion of cost synergies from the merger over a five-year period, or an annual run-rate of $1.2 billion to $1.5 billion, in terms of combined scale and scope.

He also said that the combined company will deliver expected five-year compounded annual growth rates in the range of 3% to 5% for revenues, 7% to 10% for EBITDA and 15% to 20% for free cash flow.

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