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Coverage Initiation: T-Mobile US, Inc.
Value Line has initiated coverage of T-Mobile US, Inc. (TMUS) in its flagship product, The Value Line Investment Survey. Formerly MetroPCS Communications, the company conducted a reverse acquisition of T-Mobile USA, Inc., a subsidiary of Deutsche Telekom (DTEGY), on April 30, 2013 and changed its name to T-Mobile US. As part of the transaction, MetroPCS effected a one-for-two reverse stock split, made a cash payment of $1.5 billion to its stockholders (about $4.05 per share prior to the reverse stock split), and acquired all of T-Mobile’s capital stock from Deutsche Telekom in exchange for approximately 74% of MetroPCS’s common stock on a pro forma basis. T-Mobile US began trading on the New York Stock Exchange on May 1st.
The combined company is a national provider of wireless telecommunications services (e.g. voice, messaging, data, etc.) and offers plans with no annual contracts. It is headquartered in Bellevue, Washington and maintains a significant presence in Richardson, Texas. The company is led by President and Chief Executive Officer, John J. Legere (from T-Mobile) with former MetroPCS Vice Chairman and Chief Financial Officer, J. Braxton Carter, serving as CFO. Tim Höttges, currently Deputy CEO and CFO of Deutsche Telekom, serves as Chairman of the Board. In 2012, the combined entity is estimated to have had revenues of $24.8 billion. Going forward, T-Mobile and MetroPCS will operate as separate brands.
Together, T-Mobile US is now better positioned to compete in the highly competitive wireless telecommunications industry with the likes of Verizon (VZ - Free Verizon Stock Report) and AT&T (T - Free AT&T Stock Report). This is due to its now larger spectrum holdings, broader nationwide network coverage, and greater network capacity. These factors allow the company to expand its MetroPCS brand into new metro areas and give customers access to a wider selection of devices, such as Apple (AAPL) products. Moreover, it is well-positioned with a significant presence in the industry’s fast-growing prepaid services segment. In fact, in terms of revenue, T-Mobile US becomes the leading provider of no contract plans.
T-Mobile US is estimated to have about 43 million subscribers (about 34 million T-Mobile and 9 million MetroPCS) with a network footprint covering approximately 302 million people. Of this amount, 283 million are covered by the company’s own network, with 4G services available to 228 million. This number is expected to increase by another 100 million by yearend as the 4G build continues.
Perhaps the greatest benefit of the merger may be the cost advantages of greater scale. With a larger size, the company expects to realize about $6 billion to $7 billion in cost synergies, along with annual run-rate cost savings projected at $1.2 billion to $1.5 billion after the initial integration period of about two and a half to four years. The major drivers behind the synergies include expense reductions related to tower, backhaul, and roaming expenses; customer migration to more efficient systems; and capital expenditure savings. Once these synergies start to be realized, the delevering process should begin to pick up.
Looking ahead, T-Mobile US is targeting five year (from 2012 to 2017) compounded annual growth rates in the range of 3% to 5% for revenues, 7% to 10% for earnings before interest, taxes, and depreciation and amortization (EBITDA), and 15% to 20% for free cash flow (defined as EBITDA minus capital expenditures). At the end of this period, the EBITDA margin goal is 34% to 36%.
Subscribers interested in this wireless telecommunications carrier are advised to consult Value Line’s quarterly reports, as well as any supplemental reports and relevant articles as important news items arise.
The author had positions in AAPL at the time of this article’s writing.