MetroPCS May Be No Answer for U.S.
David Paul Morris/Bloomberg
MetroPCS Communications Inc. (PCS), the
wireless carrier looking to expand, may struggle to become a
viable replacement for T-Mobile USA as ATT Inc. (T) tries to win
government approval to buy the company from Deutsche Telekom AG.
MetroPCS has less than one-third the customers of T-Mobile,
the fourth-largest U.S. wireless carrier, and covers less than
half the U.S. population. The company would need to spend as
much as $10 billion for wireless spectrum and customers to
compete with Verizon Wireless, Sprint Nextel Corp. (S) and ATT,
said Michael Mahoney, senior managing director and portfolio
manager at San Francisco-based Falcon Point Capital LLC. That is
probably beyond its capability, he said.
“They are a very niche player right now, with a specific
brand image,” Mahoney said in an interview. “They need to be
more than that to be a credible nationwide player.”
MetroPCS has emerged as the frontrunner to buy assets from
ATT and T-Mobile USA as those companies seek to complete their
merger, people familiar with the matter said this month. ATT is
trying to sell assets to address regulatory concerns that a
reduction in nationwide providers to three from four would
undermine competition, after the U.S. Justice Department sued to
block the merger in August.
MetroPCS, based in Richardson, Texas, fell 4.9 percent to
$8.50 at the close in New York. The stock has lost 33 percent
this year. ATT, based in Dallas, fell 1.4 percent to $29.31 and
is little changed this year.
Drew Crowell, a MetroPCS spokesman, declined to comment on
potential transactions. The company reports earnings tomorrow.
To compete with the largest three operators, any company
would need a critical mass of customers and wireless spectrum.
Wireless licenses are distributed by the federal government and
allow operators to offer service in specific areas.
MetroPCS had 9.1 million wireless subscribers at the end of
June, compared with 33.6 million subscribers for T-Mobile.
Verizon Wireless, ATT and Sprint had 107.7 million, 100.7
million and 53.3 million, respectively, at the end of September.
MetroPCS probably needs 25 million users to compete with
the industry giants, Mahoney said. That means it has to acquire
the equivalent of about half the subscribers at T-Mobile, which
ATT has agreed to buy from Deutsche Telekom for $39 billion.
MetroPCS had $2.16 billion in cash and short-term
investments at the end of June. It’s unlikely to spend more than
$4 billion, though it could also use stock or debt for
acquisitions, Michael Nelson, an analyst with Mizuho Securities
USA Inc. in New York, said in an interview.
The company would also need more wireless licenses to be a
national player, Mahoney said. MetroPCS currently has rights to
offer service in regions with 146 million people, about 46
percent of the population, though it hasn’t built networks in
all those places. It doesn’t operate in many smaller towns and
has limited service in cities such as Chicago and Seattle.
To compete nationally, MetroPCS probably has to add
spectrum to cover at least two-thirds of the population, or more
than 200 million people, Mahoney said. The costs for the
licenses and network to get there may exceed the company’s
current resources, he said.
The company has options to expand beyond the purchase of
ATT-T-Mobile assets. The company recently said it may buy
spectrum from Clearwire Corp. (CLWR), which is looking to raise funds
to finance a network overhaul.
Another possibility is merging with Leap Wireless
International Inc. (LEAP), a similar pay-as-you-go service provider
based in San Diego, Timothy Horan, an analyst at Oppenheimer
Co., said in an interview. Leap, which had 5.75 million
customers at the end of the second quarter, operates in regions
that would complement MetroPCS’s territory, he said.
“Leap-MetroPCS is a no-brainer,” Mahoney said. “It
completely makes sense.”
Leap’s stock has tumbled in the past four years and its
market value has dropped to less than $600 million. The company
also had $3.25 billion in bonds and loans at the end of June.
The two companies have considered a combination in the past
and haven’t been able to reach an agreement. They discussed a
merger in 2007 and failed to agree on terms.
Rather than spend money to acquire customers or wireless
licenses in new territories, MetroPCS is more likely to expand
in current regions, said Kevin Smithen, an analyst at Macquarie
Securities USA Inc. in New York. Adding spectrum in such areas
would let MetroPCS offer more subscribers faster mobile Web
access, reducing customer turnover and boosting organic growth,
“They need the spectrum immediately,” Smithen said in an
interview. In the second quarter, MetroPCS’s monthly churn, or
customer losses, reached 3.9 percent.
The company is battling a spectrum crunch as more customers
buy smartphones that use more data, which may have hurt service
quality, said Walter Piecyk, an analyst at BTIG LLC in New York.
While MetroPCS ranks high among other prepaid service providers
on cost of service, it’s among the lowest in performance and
reliability, according to J.D. Power Associates.
“When they buy the spectrum, a lot of concerns over their
growth are going to be resolved,” Piecyk said in an interview.
“Maybe they can be more aggressive on price to grow their base
MetroPCS might buy spectrum and customers in San Francisco,
Dallas, Jacksonville, Florida, and Bakersfield, California,
where the combined ATT-T-Mobile would hold more than 50 percent
of the market, Nelson said. MetroPCS already operates in the
four metro areas, and is building out a 4G wireless network to
offer faster services for smartphones.
MetroPCS Chief Executive Officer Roger Linquist said during
the company’s second-quarter call that it’s interested in
acquiring spectrum, though they will be “disciplined and
opportunistic” in doing so.
Besides the company’s financial limitations, analysts such
as Nelson are skeptical that MetroPCS even wants to expand
geographically on a large scale. Moving into less populated
regions would clash with the existing strategy, he said.
“MetroPCS management has repeatedly stated in the past
their desire to focus on large urban markets,” Nelson said. “I
do not think it’s their intention to become a nationwide
To contact the editor responsible for this story:
Peter Elstrom at [email protected]