Declaring it's "here to stay," Deutsche Telekom forged a deal to merge its T-Mobile USA unit with MetroPCS on Wednesday, aiming to knit together radio spectrum to compete with leaders Verizon Wireless and AT&T.
The deal comes just 13 months after federal regulators rejected T-Mobile USA's sale to AT&T (NYSE:T), saying that would "remove a significant competitive force" from the U.S. wireless market.
"Longer term, this deal will be a headache for Verizon (VZ) and AT&T," said Roger Entner of research firm Recon Analytics.
Analysts had expected a bigger stake for MetroPCS — UBS saw up to 38%; Nomura and Deutsche Bank forecast 30%. MetroPCS shares fell 10% after Tuesday's 18% deal buzz spike. Prepaid rival Leap Wireless (LEAP), also a possible takeover target, dived 18%.
By combining radio spectrum licenses, the merged company aims to expand 4G wireless broadband services using LTE (long-term evolution) technology. Deutsche Telekom says it will shut down MetroPCS' CDMA-type network before 2016 and reuse those airwaves for LTE services.
Both T-Mobile USA, No. 4 in the market with 33.2 million customers, and MetroPCS, with 9.3 million, have been losing market share to Verizon and AT&T.
"This is not a deal about surviving," John Legere, recently named CEO of T-Mobile USA, said on a media conference call. "This transaction signals our staying power in the U.S. and our commitment to the U.S. ... T-Mobile is here to stay.
The new company would have 42.5 million subscribers, still No. 4 behind Sprint Nextel (NYSE:S). Jefferies analyst Ulrich Rathe says the deal "does not solve T-Mobile's strategic issue — lack of scale," meaning its ability to improve profit margins by lowering operating costs.
The deal dealt a blow to Sprint, which also had been in talks with Dallas-based MetroPCS. A Sprint tie-up with the new T-Mobile/MetroPCS is still possible, analysts say, but would face regulatory hurdles.
Sprint could pursue a "business arrangement" with satellite TV firm Dish Network (DISH), which has cobbled together radio spectrum assets, RBC analyst Jonathan Atkin said in a report.
Sprint shares rose 6% Wednesday, erasing Tuesday's 5% loss on the T-Mobile deal talk.
T-Mobile/MetroPCS pressures Sprint as both rivals target customers that prefer no-contract, or prepaid, plans, says Recon's Entner.
"It's a deal about spectrum," Entner said. "It makes T-Mobile a lot stronger because it can offer LTE almost anywhere.
T-Mobile/MetroPCS says it'll stick to a strategy of selling unlimited data plans to budget-conscious consumers. Verizon and AT&T are trying to improve profitability by capping how much data users can download.
"This will mostly cause pain on the Sprint side, the other value provider," Entner said.
Neither MetroPCS nor T-Mobile sells Apple's (AAPL) iPhone. The iPhone gives AT&T and Verizon Wireless an edge signing up higher-spending customers.