The Telecommunications Consolidation has begun

Hello fellowship,

I posted earlier in March about the T-Mobile and MetroPCS merger. The scenarios that needed to occur did indeed occur as I predicted. T-Mobile met the demands of Paulson and PSAM and reduced the debt load. The readjustment actually closed higher than the expected Price/Share that was stated in the SEC filings. However, that is expected since the new deal that reduced the debt load. Furthermore, now that T-Mobile has more of a wireless spectrum to work with it can compete with the 2 top U.S. wireless which is dominated by Verizon and AT&T by market share.

 Moreover, The wheels of time have begun to spin. The next pivotal paradigm in making noise in the telecommunications company will be the decision to expand their global network by buying out LEAP wireless. An article written by Mayank Rasu  from Seeking Alpha shares the same view as I. He even provides the link to the same article in which I read as well where the analyst predicts that there is a 70% chance for a buyout of LEAP wireless (LEAP). However, it is once again speculation. The information from the analyst could indicate that it is possible because they have deeper access to information than the retail investor. Moreover, I do not merely speculate on the Merger and Acquisition component alone. The company's fundamental has shown that it has exemplified a "Value" to it as Mayank Rasu reiterates. The reason is because it has consistently improved it's revenue over the years and has attracted users with it's prepaid service plans. In addition, the wireless spectrum it owns is like an oiling rig that pumps "black gold" in terms of the telecommunications spectrum. This "treasure" that LEAP wireless holds truly is the hidden gem that will assist bigger telecommunications company expand their wireless spectrum along with their customer base. In addition, the competition for air waves over the years and the demand for air wave  will further intensify the game to see who can control the platform. 

The other side of the argument is that it has taken on excessive debt load, and I myself have agreed with the amount of debt the company has on it's financial statements. However, the company has recently closed a $1.45 Billion Loan that indicates that it is slowly addressing the problem.

The closing of the T-mobile and MetroPCS entities has created a minute tidal wave in the industry, but not a torrential storm. As you drive out to your local shopping area, you may begin to notice that all MetroPCS  dealers will slowly change their signs to "T-Mobile." Also, It seems that it would be in the best interest for T-Mobile and MetroPCS to consider LEAP Wireless because it matches its future plan for how T-Mobile will service its customers. CEO of T-Mobile, John Legere, has already rolled out a plan that is similar to "Pre-Paid" service in which people can select plans without worrying about being restrained to the usual "2-Year Contract." This is exemplified in the T-Mobile commercials that you will see appear on TV in the year of 2013. The commercial depicts how T-Mobile Cowboy has a pink Hat, who is part of a big group of cowboys who represent the big players in the telecommunications industry and they speak about how they like things are being contained. Then the cowboy with the pink hat (representing T-Mobile) walks away from the group and says he will make the shift that will help the public. This commercial is trying to get the message through that T-Mobile is trying to create the new paradigm in this saturated industry full with smart phones. Ultimately, more consolidation is going to be needed and if T-Mobile wants to position itself in market share and entity presence. The firm may want to evaluate their alternatives and attain a hidden gem at a good price that will further expand their "network": Which may include taking the "Leap" of faith that will assist in its strategy and operations down the road.

Phil
At the time of this writing, I have no positions in the securities listed above, but may position myself in LEAP wireless as soon as the merger is settled officially and evaluate what T-Mobile's next strategy will be.

Today I will solely focus on the Wireless consolidation between T-Mobile and MetroPCS. American cellular service is dominated by Verizon and AT&T in the wireless spectrum in the United States. The chart above shows the market share of the top U.S. wireless carriers, and market cap is based on only these top players. It is no coincidence that both of them own a large portion of market share in this industry. According to David Goldman, T-Mobile is only the 4th largest carrier by cell phone subscribers. The above indicates that the merger should be seriously considered because there is too much disparity in market cap between the competitors. Sprint has lost market share and customers over the years and soon should be bought up by Softbank (a Japanese company). Paulson and the research company by the acronym of PSAM agree that the merger will definitely create synergies and cost savings that are in the billions in the statements filed with the SEC. Moreover, the Shareholders meeting is taking place on March 28, 2013 and the idea is that shareholders will get $4.06 per share over the closing price on March 27, 2013. The deal is very complex in which it is not straight Cash, Debt, and Equity deal. It involves all three, but it is structured in a Reversed 1-to-2 Stock Merger as well.

The deal would give T-Mobile 74% of the company power and 26% to MetroPCS shareholders after dilation of shares and the creation of the new merged company. The biggest obstacles to this merger is John Paulson and P. Schoenfeld Asset Management who will not approve the terms. However, they will consider relinquishing their shares if the proposal was revised based on 2 main requirements. The first, T-Mobile adjust the Debt interest rate from 8% to 4.2% to decrease the EBITDA multiple. secondly, they decrease the debt financing by $6.6 billion. Based on these requests by the two large shareholders, I believe T-Mobile will implement a sense of game theory. Either, cooperate or defect. The consequence of defecting will be dire. The reasoning is because of detrimental business environments. One possibility is that T-Mobile will further lag behind AT&T and Verizon. In addition, they will have a smaller network of wireless towers. Moreover, The shares could possibly drop due to a failed merger announcement. Going forward, the business for wireless technology is fierce and if the consolidation does not occur the two companies will be left behind in the United States. Now if the outcome is cooperate, then we may see some upside. The shareholders will most likely get the 47% ($14.93) adjusted premium from the price close of $9.39 which is what the SEC filling holds as the share price closing assumption on the day of the imminent merger.

Paulson owns about 8% of MetroPCS and his hedge fund as dropped from $38 Billion to $11 Billion since 2011 which means he is banking pretty heavily on this Event Driven "bet." That is why he filed his ultimatum and is trying to influence the public to manipulate the deal in which he stands to gain substantially. Overall, besides Paulson's interest in the situation the companies will benefit if they merged together. Ultimately, we will see on March 28 how shareholders will vote and determine the future of these 2 firms.

-Phil

Weekly Market Dose: Office Depot and Office Max Merger and others

Lucrative posted on 02/22/13 at 04:48 PM

Hello Ladies and Gentlemen,


Another hustling and bustling week in the Financial Market this week. Notable inputs I had this week include:

• The 2 Day Bear run and a miniature rally on Friday
• The leaked merger between Office Depot and Office Max
• NetSpend being sold to Tsys

Office Depot and Office Max Merger
This has been an interesting Merger and Acquisition scenario. This was a "Merger of Equals" scenario, but Office Depot is paying about 2.69/Share for every Office Max share that shareholders own. The hyperlink above that explains the leaked merger by Thomas Reuters has created a deviation from Financial Academia case study. To elaborate, despite this being a Merger of Equals case scenario the overall hedge strategy did not turn out to be the norm. The reason is because the "arbitrage" or "hedge" should of been Office Depot stock share dropping because of taking additional debt and decreasing its financial statements; While, Office Max should of been sold at a percentage of the agreed premium over the price that the announcement was made. Another possibility is that the merger wasn't ready for the public to view, and it triggered Wall Street to assume that it could of been a failed merger which resulted in the price of both firms to go back to "Fair Value." There are other reasons why the scenario did not play out the way it did, and I encourage the viewer to share their view. Ultimately, the merger will still occur and this will create consolidation for the Office Retail industry and create cost savings for both firms in hopes that it can compete with Amazon, Wal-mart, and Staples (to name a few). Interestingly enough Staples was once Romney's creation and now that #2 and #3 in Office Retail industry have merged this will create speculation on Staples being bought out by a Private Equity firm even if Staples holds a strong hold after its restructure.

NetSpend sold to Tsys for $1.4 Billion
One of the "Diamonds in the Rough" I discussed earlier last week would be "NetSpend." The Small Cap firm that had a market capitalization of about 1.1 Billion was recently sold for $16.00/share. The Business is innovative and are one of many start ups who are trying to revolutionize the financial payment industry. I believe in the next few years there may be a shift in how currency or liquid assets will transact due to ever changing Global Currency War concerns and the convenience of data information mining such as electronic wallets.

Closing Thoughts
The activity of business buyouts are still "Full Steam Ahead," but investors should tread lightly when speculating on the next buyout. Make sure to perform due diligence and research before investing in a business. The market indexes such as the DOW and SP 500 are starting to display signs of saturation and possible "market bloating," and indicate a pull back. I am not implying a bubble (read this for another view on the bull run thus far). Possible case scenario models may appear on future blogs I post, which will hopefully release every Friday. Thank you all for taking the time to read my posts, and I look forward to sharing insightful financial discussions soon.