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MetroPCS Pops on Merger Talk, but Sprint Shuffles Lower

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Sorry, Sprint (S) shareholders. It looks like the years-old rumblings that the phone company might be coveted by Germany's Deutsche Telekom (DTEGY) aren't coming to pass, again. No matter how many times it comes up, it just isn't happening.

Sprint's stock fell 5.4% to $4.90 on heavy volume Tuesday while MetroPCS (PCS) surged nearly 18% on five times its average daily volume. Why the big moves? A report that MetroPCS, not Sprint, is about to sign a merger agreement with a division of DT.

For MetroPCS, the bounce continues what's been a summer of love. Back on June 26, it had its second-lowest close ever at $5.59. As of end of trading Monday, it had doubled, making the prepaid-cellular service provider the best percentage gainer in the S&P 500 during that span. Then, of course, more gains came today. Also worth pointing out here is that despite the opposite headings of MetroPCS and Sprint on the DT development, Sprint hasn't exactly been shabby the past three months -- it's the S&P's No. 3 performer since late June, registering a climb of 65.5%.

According to Bloomberg, DT is preparing an arrangement with MetroPCS with the aim of increasing the size of its T-Mobile USA unit, which had been hoping to merge with AT&T (T) before the U.S. government said last year it would block that proposed $39 billion deal.

The report said the agreement could be confirmed as early as Wednesday. If it does happen, it would create a cellular company with around 42 million users, with most of those already being on the T-Mobile side.

MetroPCS Stock Chart

DT clearly could have saved itself a fair bit of money if it had acted a little sooner -- as noted above, only a quarter ago MetroPCS shares weren't even half where they are now. The stock closed up 17.8% to $13.57, and earlier it traded as high as $14.51. The last time it ended at that level was March 2011.

MetroPCS has already been trading above the consensus Wall Street price target, which FactSet shows at $9.09, for several weeks. Still, even with a strong summer and a boost from a possible merger, MetroPCS is only about one-third of where it was in its best days of July 2007. Back then, the stock saw its highest close ever, at $40.33.

Any time an agreement like this is signed, regardless of the industry, talk turns almost immediately to the notion of further consolidation, and that was the case here. Barron's has a nice piece that discusses some of the possibilities, including whether Leap Wireless (LEAP) could end up in play. Leap was having a good day on that hope, climbing 8.4% to $7.59.

Of note is that the report cites an analyst who speculates that the valuation put on MetroPCS "may not constitute a substantial premium to PCS' current share price." MetroPCS has a market cap of right at $5 billion and an enterprise value of about $7.5 billion. Cash and equivalents total around $2.2 billion. The deal, in fact, might not be a straight buy. Bloomberg said it could "involve multiple steps including a stock swap."

The largest shareholder of MetroPCS is Los Angeles-based Capital Research & Management, the investment adviser to the American Funds, with 44.3 million shares worth $510.8 million. That amounts to a 12.2% stake, FactSet says. Next is New York's Jennison Associates, with 23.7 million shares, a 6.5% stake, and Malvern, Pa.'s, Vanguard Group, with nearly 20 million shares, or 5.5%.

As for who's cut back, a big seller earlier this year -- between March 31 and June 30, the latest available quarterly data -- was Boston money manager Wellington Management Co. The firm parted ways with almost 19.5 million shares of MetroPCS during the second quarter, the bulk of its holdings in the stock, leaving it with 2.1 million shares.

So that won't make Sprint feel any better for now, but at least it can know it's not alone in missing out.