Proxy advisor Glass Lewis on Friday became the second firm to suggest that MetroPCS Communications Inc shareholders vote against a proposed merger with T-Mobile USA, adding pressure on Deutsche Telekom AG to sweeten the deal.
The move by No. 2 proxy firm Glass Lewis backs efforts
by two key activist investors to block the deal, the day after leading proxy firm ISS said shareholders should vote against the deal with T-Mobile USA, the U.S. business of Deutsche Telekom.
If the deal collapses, it would be a huge blow for Deutsche Telekom after being forced in 2011 to abandon its plan to sell T-Mobile USA to AT&T for $39 billion amid regulator opposition.
The failure of that 2011 plan cost T-Mobile USA some customers as the company focused away from its core business.
T-Mobile USA - the No. 4 mobile provider in the United States - and its smaller rival MetroPCS want to pool their spectrum resources and networks in order to better compete with larger rivals Verizon Wireless, AT&T Inc and Sprint Nextel.
But Glass Lewis said the current deal undervalues MetroPCS's contribution to the combined company. Staying independent would help MetroPCS shareholders reap more value in the short term, the proxy firm said in a report.
A 'no' vote by MetroPCS shareholders could also prompt a better offer, Glass Lewis said.
According to analysts, the negative reviews from proxy firms could likely force Deutsche Telekom to change the deal terms. That could mean reducing the proposed debt load of the combined company and corporate governance changes.
The proposed debt load of $21 billion is the biggest gripe MetroPCS shareholders have with the deal, according to analysts and investors.
Jonathan Chaplin, an analyst with New Street Research, said shareholders would likely push for less onerous terms on the debt and for governance changes as well as lower debt levels, before they would vote for the deal.
But shareholders could look for governance changes as well.
A MetroPCS spokesperson said in an emailed statement that the board remains committed to the deal and thinks it is in the best interest of stockholders.
MetroPCS declined to say if the recommendations would lead to any changes to the deal. Representatives for Deutsche Telekom did not respond to requests for comment on the Glass Lewis recommendation.
Paulson & Co, the biggest MetroPCS shareholder, and P. Schoenfeld Asset Management, another big shareholder, had both committed to vote against the deal on concerns about the valuation and the amount of debt being assigned to the combined company.
Even so, another major shareholder - Madison Dearborn - had thrown its weight behind the deal. A smaller advisory firm, Egan Jones, had also recommended its clients vote in favor of the transaction.
Under the terms of the reverse-merger announced in October, Deutsche Telekom would end up with a 74 percent stake in the combined company, and MetroPCS would declare a 1-for-2 reverse stock split and pay $1.5 billion in cash to its shareholders.
On top of these issues, the companies are soon expected to face tougher competition from an emboldened Sprint, which has agreed to sell 70 percent of its shares to Japan's SoftBank Corp for $20 billion.
P. Schoenfeld Asset Management LP, which says it owns about 2.5 percent of MetroPCS, is leading a proxy battle against the deal. Paulson & Co has a 9.9 percent stake, and Madison Dearborn owns about 8.3 percent of MetroPCS shares, according to the most recent public disclosures.
MetroPCS shares have slid more than 8 percent since October 1, 2012, the day before reports emerged that MetroPCS and Deutsche Telekom were in talks.
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