T-Mobile Merging with MetroPCS, Forming New Independent Carrier

T-Mobile, the fourth-place U.S. wireless carrier, is splitting from its German parent to compete in the domestic mobile market as a standalone public company.

T-Mobile and MetroPCS, a smaller pre-paid carrier based in Texas, announced their plans to form a new company on Wednesday morning. MetroPCS and T-Mobile’s parent company, Deutsche Telekom, had confirmed a day earlier that they were discussing a possible merger.

The new company will retain the T-Mobile brand and continue to be headquartered in Bellevue, WA. Deutsche Telekom will own 74 percent of the stock in the new company, with current MetroPCS shareholders getting about $1.5 billion in cash.

New T-Mobile CEO John Legere will head the combined company. Executives said the new company would find $6 billion to $7 billion in “cost synergies.” It wasn’t immediately clear what kind of layoffs that might mean at either MetroPCS or T-Mobile—the latter company announced some 900 layoffs in May, under previous CEO Philipp Humm.

It’s quite a turnaround for T-Mobile, which was the target of a failed $39 billion takeover bid from No. 1 U.S. carrier AT&T last year. Federal regulators squashed that deal, seeding the ground for consolidation in the lower tiers of the market instead.

The new T-Mobile is projected to have about 42.5 million subscribers, which still leaves it in the No. 4 position nationally, behind Sprint’s 56 million. T-Mobile still doesn’t have the iPhone, leaving it as the last major U.S. carrier without Apple’s market-creating smartphone.

There’s a technological roadblock to the two companies combining, however: Their existing third-generation wireless networks run on different technology platforms. That means the new, combined T-Mobile will have to manage two separate customer bases, at least for a while.

There’s a big, stinking precedent for that kind of combination: Sprint’s 2005 merger with Nextel, which became a financial disaster. One financial analyst famously said that a mashup of T-Mobile and MetroPCS would make “one ugly baby.

In a conference call with Wall Street analysts, Legere and other executives sought to downplay that difficulty. They said that MetroPCS customers, who aren’t on long-term contracts, get new phones so rapidly that it will be relatively easy to migrate both sets of customers to a new, fourth-generation network based on the long-term evolution (LTE) standard.

“People think that the integration will be difficult. Very clearly I want to point out: No. That is not what this is about. This is not a replay of a debacle that people have seen in the past,” Legere said. “We will not smash together networks with two different technologies.”

Executives also highlighted their compatible spectrum assets as part of the plan to move the customer bases over to the LTE standard. “We expect minimal customer losses in the transition,” Legere said, with plans to complete the migration to a 4G network by the end of 2015.

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