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MetroPCS (NYSE:PCS) exploded on October 2 when word came out that Deutsche Telekom AG wanted to merge its T-Mobile division with the company. Two days later, the stock is falling off the other side of the mountain because T-Mobile may have lost $13 billion of its value, making the combined entity less appealing.
Last year, a $39 billion plan to sell the unit to AT&T (NYSE:T) was abandoned because of regulator opposition, but recent evaluations have slashed the company’s value. T-Mobile has lost about 7.6 percent of its subscribers, and based on analyst estimates and MetroPCS’s share price, the company is worth about $26 billion, including debt.
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Frederic Boulan, an analyst at Nomura, told Bloomberg, “T-Mobile’s implied valuation is not as good as in the AT&T deal. Still, the merger has the potential for synergies and if the new company delivers, there is a path for a profitable exit for Deutsche Telekom.”
Smaller wireless carriers have been looking for a way to compete with Verizon Wireless – 55 percent owned by Verizon (NYSE:VZ) and 45 percent owned by Vodafone (NASDAQ:VOD) — and successful mergers could both grow a company and cut costs. Combining wireless networks and collaborating on handset purchases could save as much as $1.5 billion annually in the MetroPCS and T-Mobile deal. These reduced costs and a larger total subscriber base could make all the difference in the wireless market. But seeing as the networks are incompatible, MetroPCS users will have to move to the T-Mobile network. Convincing customers to do this could cause some problems.
Sprint (NYSE:S), with an otherwise strong year to date, has tumbled since the news. If the merger goes through, the company is likely to be worse for the wear. The stock was downgraded to “Underperform” by Robert W. Baird, with a price target of $3. If Sprint wants to grow through merger, it will either be forced to try and buy a much larger T-Mobile, or gobble up a smaller carrier like Leap Wireless (NASDAQ:LEAP). Leap, by the way, also crashing on October 4.
Don’t Miss: Will Sprint Get Left In The Dust By This Merger?
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