In a letter to MetroPCS’s board of directors dated Feb. 28, Paulson wrote that a merger between MetroPCS and the privately held T-Mobile would have too much debt to compete within a well-capitalized and rapidly consolidating U.S. wireless industry. The resulting risk would be greater for MetroPCS shareholders, while Deutsche Telekom, 74% shareholder and holder of $15 billion of the company’s $23.2 billion in debt, would receive the bulk of the value.
With a net debt to 2013 EBITDA multiple of 3.6x, combined enterprise value to LTM EBITDA multiple of 4.7x and 7% interest rate, MetroPCS/T-Mobile equity would carry substantial risk, he said.
Further, he stated that MetroPCS has performed better than T-Mobile, reporting record EBITDA of over $1.5 billion in 2012, a 14% year-over-year increase; EBITDA margins of 29.6%, increased 216 basis points over 2011; a 40 basis-point decrease in annual church to 3.4% in 2012; more than 2.2 million 4G LTE subscribers, increased 117% from the previous quarter; and various operational advantages.
T-Mobile meanwhile reported decreases in sales, EBITDA, EBITDA margin and ARPU in 2012 compared to 2011.
Paulson suggested in the letter to solve the disparity in the deal by reducing the amount of debt Deutsche Telekom (DTEGY) would contribute and the interest rate. Alternatively, he would support the deal under a modified debt structure, increased exchange ratio for Metro PCS shareholders, added cash, or a combination of those.
“We believe that the stock could appreciate significantly if the merger is voted down,” he said.
He also added, “We believe MetroPCS will be worth more as a stand-alone company than it would be if it merges with T-Mobile. Since the merger with T-Mobile was announced MetroPCS stock has declined 27.1% while the wireless industry weighted average has risen 0.7%.”
MetroPCS first confirmed that it was in talks with Deutsche Telekom concerning a merger with T-Mobile USA on Oct. 2. The following day, it formally announced the proposal in which MetroPCS shareholders would receive $1.5 billion in cash and 26% ownership of the combined company, and Deutsche Telekom would receive 74% of the company.
The combined company would 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” while “targeting an EBITDA margin in the range of 34% to 36% at the end of the five-year period and achievable projected cost synergy realization with an annual run-rate of $1.2-1.5 billion,” the official statement said.
It would also have “approximately 42.5 million subscribers, $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,” based on analyst consensus estimates.
Other Gurus clambered to MetroPCS in the fourth quarter. Jeremy Grantham, Mario Gabelli and Jean-Marie Eveillard all established new positions, as Joel Greenblatt almost doubled the size of the stake he began in the first quarter of 2012.
Paulson also stated in his letter that he “believes in the merits of U.S. wireless consolidation,” which is reflected in his 127,693,000 million-share purchase of Sprint (S) and 7.8 million-share holding and fourth quarter increase of Leap Wireless International (LEAP). Communication Services accounts for 13.3% of his portfolio, and is his third greatest sector weighting.
See John Paulson’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of John Paulson.
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