Billionaire John Paulson is MetroPCS Communication's (PCS, Financial) largest shareholder, owning almost 10% of the company's outstanding shares. However, in a statement last week, he announced that his hedge fund Paulson & Co. will oppose MetroPCS' planned merger with Deutsche Telekom AG’s T-Mobile business.
MetroPCS is Paulson's 14th largest public equity holding as of the end of the fourth quarter, with him owning some 31.8 million shares. Paulson first took a new position during the third quarter, and then upped his stake by 34% during the fourth quarter. It appears that many MetroPCS investors have similar feelings as Paulson, as the stock has been pushed down over 20% since the deal's announcement.
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The MetroPCS-T-Mobile merger calls for Deutsche to take a 74% stake in the new company, with MetroPCS getting 26%. The benefits for the deal include gaining access to T-Mobile’s advanced B2B services and Mobile virtual network operator (MVNO) platform, while T-Mobile could utilize MetroPCS’ superior market position in its no-contract wireless services.
Although the merger with T-Mobile would boost MetroPCS’ presence in the 4G space, as well as its spectrum capacity, the deal valuation and debt concerns make it unattractive to Paulson and others. Paulson has voiced support for P. Schoenfeld Asset Management’s view that the current deal undervalues MetroPCS’ contribution significantly. His analysis shows that MetroPCS should indeed get upwards of 41.7% of the new company, as opposed to the 26% the current deal affords it:
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Other companies have even come into play as possible acquirers of MetroPCS. Prior to the Deutshe announcement, Sprint had considered buying the company for $13.39 per share, and Dish Network had offered $11 per share.
So should investors still invest in MetroPCS regardless of the deal?
AT&T (T, Financial) and Verizon (VZ, Financial) have been clamoring for the top U.S. mobile market share for the last couple of years (see who’s the best bet). Although both AT&T and Verizon trade at comparable multiple premiums, they are leaders in the market. Prior to this, a deal for AT&T to acquire T-Mobile fell apart due to antitrust concerns. Meanwhile, Sprint is looking to become more competitive by taking a sizable investment from Softbank, which has afforded the company with the means to snatch up the illustrious Clearwire. However, I still like MetroPCS' presence in emerging markets and the prepaid market, compared to that of AT&T and Verizon. MetroPCS is a leader in prepaid wireless broadband services; Verizon has less than has less than 2% of the prepaid market share, while AT&T has around 2.5% and Sprint 5%. MetroPCS, on the other hand, has managed to penetrate almost 9% of the prepaid market. The emerging market of prepaid services is expected to account for nearly one-fourth of the wireless market share by 2018.
So how does MetroPCS stack up from a valuation perspective? It’s nearly the cheapest on a number of metrics:
Price to Cash Flow
EBITDA Margin
5-Year Expected EPS Growth (Wall Street estimates)
Paulson believes that the deal would saddle the new company with too much debt, and that MetroPCS is worth more as a standalone company. This appears to be true. MetroPCS has managed to show 20% annual subscriber growth for the last five years and continues to be one of the lowest-cost wireless providers. What's more is that the company expects a five-year compounded annual growth rate for free cash flow in the range of 15% to 20%. MetroPCS has many growth prospects as a standalone company, and a buyout could still produce a premium from current trading levels.
MetroPCS is Paulson's 14th largest public equity holding as of the end of the fourth quarter, with him owning some 31.8 million shares. Paulson first took a new position during the third quarter, and then upped his stake by 34% during the fourth quarter. It appears that many MetroPCS investors have similar feelings as Paulson, as the stock has been pushed down over 20% since the deal's announcement.
”‹
The MetroPCS-T-Mobile merger calls for Deutsche to take a 74% stake in the new company, with MetroPCS getting 26%. The benefits for the deal include gaining access to T-Mobile’s advanced B2B services and Mobile virtual network operator (MVNO) platform, while T-Mobile could utilize MetroPCS’ superior market position in its no-contract wireless services.
Although the merger with T-Mobile would boost MetroPCS’ presence in the 4G space, as well as its spectrum capacity, the deal valuation and debt concerns make it unattractive to Paulson and others. Paulson has voiced support for P. Schoenfeld Asset Management’s view that the current deal undervalues MetroPCS’ contribution significantly. His analysis shows that MetroPCS should indeed get upwards of 41.7% of the new company, as opposed to the 26% the current deal affords it:
”‹Other companies have even come into play as possible acquirers of MetroPCS. Prior to the Deutshe announcement, Sprint had considered buying the company for $13.39 per share, and Dish Network had offered $11 per share.
So should investors still invest in MetroPCS regardless of the deal?
AT&T (T, Financial) and Verizon (VZ, Financial) have been clamoring for the top U.S. mobile market share for the last couple of years (see who’s the best bet). Although both AT&T and Verizon trade at comparable multiple premiums, they are leaders in the market. Prior to this, a deal for AT&T to acquire T-Mobile fell apart due to antitrust concerns. Meanwhile, Sprint is looking to become more competitive by taking a sizable investment from Softbank, which has afforded the company with the means to snatch up the illustrious Clearwire. However, I still like MetroPCS' presence in emerging markets and the prepaid market, compared to that of AT&T and Verizon. MetroPCS is a leader in prepaid wireless broadband services; Verizon has less than has less than 2% of the prepaid market share, while AT&T has around 2.5% and Sprint 5%. MetroPCS, on the other hand, has managed to penetrate almost 9% of the prepaid market. The emerging market of prepaid services is expected to account for nearly one-fourth of the wireless market share by 2018.
So how does MetroPCS stack up from a valuation perspective? It’s nearly the cheapest on a number of metrics:
Price to Cash Flow
- MetroPCS 3.4x
- Verizon 7.7x
- US Cellular 4.5x
- AT&T 8x
- Deutsche 12.6x
- MetroPCS 0.7x
- Verizon 1.1x
- US Cellular 0.7x
- AT&T 1.6x
- Deutsche 0.6x
EBITDA Margin
- MetroPCS 29%
- Verizon 26%
- US Cellular 18%
- AT&T 24%
- Deutsche n/a
5-Year Expected EPS Growth (Wall Street estimates)
- MetroPCS 16%
- Verizon 7%
- US Cellular 6%
- AT&T 6%
- Deutsche 17%
Paulson believes that the deal would saddle the new company with too much debt, and that MetroPCS is worth more as a standalone company. This appears to be true. MetroPCS has managed to show 20% annual subscriber growth for the last five years and continues to be one of the lowest-cost wireless providers. What's more is that the company expects a five-year compounded annual growth rate for free cash flow in the range of 15% to 20%. MetroPCS has many growth prospects as a standalone company, and a buyout could still produce a premium from current trading levels.
