Wireless Providers Surge on MetroPCS, T-Mobile Merger Report

NEW YORK ( TheStreet) -- On the heels of a stock slump after it missed first quarter earnings and saw subscriber losses, MetroPCS ( PCS) is again the subject of merger speculation as struggling telecoms surge on the prospect of industry consolidation.

Bloomberg reports that Deutsche Telekom is considering merging its U.S.-based unit T-Mobile USA with MetroPCS. The report comes just months after T-Mobile's attempted merger with AT&T ( T) was blocked by the Department of Justice on antitrust concerns.

It's not the first time MetroPCS has been mentioned in M&A reports. In late February, the company was close to unveiling a merger with Sprint ( S) -- another struggling wireless carrier -- until a deal fell apart at the last hour. Now expectations that sector laggards will consolidate have some telecoms surging.

According to Bloomberg, Deutsche Telekom is considering a stock-swap of its T-Mobile unit with MetroPCS that would give the German telecom giant control over the combined entity. Those reports cite unnamed sources, who also note that Europe's second largest phone company could sell or IPO its Richardson, Texas-based T-Mobile unit.

Already, Deutsche Telekom is looking to sell T-Mobile assets such as cellular towers in a move to bolster its balance sheet. Meanwhile, MetroPCS was considered a key piece of T-Mobile's attempted $39 billion merger with AT&T, because it was a likely acquirer of divested assets that would have been recommended by antitrust regulators.

MetroPCS shares surged nearly 20% to $7.72 on reports of a potential merger. Still shares in MetroPCS are off over 11% year-to-date and nearly 60% in the last 12 months on the prospect of subscriber losses. Leap Wireless shares also rose nearly 20% to $6.04 signaling investor expectations that it could become the target of strategic interest, while Sprint rose over 3%.

Leap they haven't: all three companies' shares have lost over 50% in the last year.

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Recent earnings at T-Mobile, Sprint, MetroPCS, and Leap Wireless ( LEAP) signal that smaller carriers and even Verizon ( VZ) and AT&T, the top two U.S. wireless providers, are struggling to benefit from a surge in smartphone sales led by Apple's ( APPL) iPhone.

"AT&T and Verizon are the only two companies in the U.S. wireless industry that will earn enough to cover their cost of capital," wrote Moody's in a Feb. 13 note that highlighted a Sprint and MetroPCS tie-up as a possibility among scenarios of needed consolidation within the telecom sector.

"Investors are already walking away, making it harder for the carriers to attract capital to keep pace," added Moody's.

In attempting to buy MetroPCS in what could have been a $8 billion deal, Sprint was likely to use its low-priced stock to fund the deal because of limited access to debt markets. Analysts noted that a deal would likely have diluted Sprint's stock by 50% at the time, while bringing in much needed cash. "Investors are already being asked to fund a ~$15bn commitment to Apple in order to sustain postpaid market share," noted Nomura analyst Mike McCormack in February.

Still, even after Sprint's failed MetroPCS merger attempt, analysts expected that consolidation was likely in the user and service growth starved wireless industry, with many highlighting continued strategic interest in MetroPCS and Leap Wireless. "With or without a Sprint deal, these companies remain viable targets for larger carriers," wrote Bernstein Research analyst Craig Moffett in a February note to clients.

Currently, Sprint is struggling to build out and revamp a national wireless network in a project called Network Vision that may help it compete with industry leaders Verizon and AT&T in handling expected increases in smartphone data loads.

Recently, Sprint cut ties with a struggling 4G service build called LightSquared. The venture is owned by hedge fund Harbinger Capital Management and is facing the prospect of bankruptcy. Analysts such as Moffett of Bernstein also see the success of Sprint's project as a key to its survival.

Deutsche Telekom's interest in a T-Mobile merger with MetroPCS and Sprint's failed attempt at M&A are all signals of why consolidation efforts are a key for the industry in 2012, after AT&T spent most of 2011 battling with regulators.

For more on the wireless industry, see why AT&T is still hungry for more spectrum and how a tower deal twists industry consolidation. For more on M&A, see 5 deal ready stocks loved by hedge funds.

-- Written by Antoine Gara in New York

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