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Amid MetroPCS Merger, T-Mobile To Boost Pre-Paid Services

7:56 AM, Oct 4, 2012   |    comments
T-Mobile (Getty)
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San Francisco (written by Roger Yu/USA Today) -- T-Mobile USA's merger with MetroPCS Communications is a move by the nation's fourth-largest wireless carrier to cement its place in an increasingly competitive market and focus more on attracting price-sensitive customers, analysts say.

After years of struggling, T-Mobile is teaming with a company known for its pre-paid, no-contract accounts and plan options, which are cheaper than those offered by Verizon Wireless, AT&T and Sprint.

The transaction will help the new combined company capitalize "on its leading position as a provider of fast growing no-contract services," T-Mobile said in a statement.

The stock and debt-restructuring deal requires MetroPCS to pay $1.5 billion in cash to its shareholders. Deutsche Telekom, which owns T-Mobile, will own 74% of the combined company.

The new company will take the T-Mobile name, replace MetroPCS on the New York Stock Exchange, and be led by John Legere, the current CEO of T-Mobile.

The deal, which has to be approved by regulators, is expected to close in the first half of next year.

MetroPCS shares fell $1.33 to $12.24 Wednesday.

In need of more wireless airwave space and cash to expand its business, T-Mobile has been looking to partner with another carrier. The MetroPCS deal comes roughly a year after federal regulators, citing antitrust concerns, quashed AT&T's attempt to buy T-Mobile for $39 billion. The new T-Mobile, which will have more than 40 million subscribers, would still trail the third-largest carrier, Sprint.

"We are committed to creating a sustainable and financially viable national challenger in the U.S., and we believe this combination helps us deliver on that commitment," says Rene Obermann, CEO of Deutsche Telekom.

Once combined, T-Mobile plans to use the wireless spectrum that it will acquire as part of the deal to expand its 4G Long-term Evolution (LTE) network and broaden its choice of smartphones. T-Mobile is trailing its rivals in LTE expansion and still doesn't sell the popular iPhone, both of which have remained sore points for customers. T-Mobile has lost about 2.8 million customers in the past two years.

In its marketing campaigns, T-Mobile has positioned itself as a cheaper option for customers who cringe at wireless bills that often exceed $100 a month. But in the market for price-sensitive customers, it has faced stiff competition from companies like MetroPCS and Leap, which sell no-contract accounts that are cheaper.

"In recent years T-Mobile tried to move up-market with new smartphones and 4G marketing, but the perception of its network has been hard to overcome," Walt Piecyk, an analyst with BTIG in New York, wrote. "MetroPCS had particular success at eating away at both their pre-paid and their post-paid customers."

The two companies' networks aren't compatible, and, for now, they'll be run as separate units. But MetroPCS customers will be shifted to a common network as they upgrade their handsets.

T-Mobile says the merger will also create about $6 billion to $7 billion in "cost synergies."

Chetan Sharma, an independent mobile analyst, says T-Mobile ultimately may be more interested in converting pre-paid customers to its more expensive post-paid accounts. "Pre-paid doesn't pay the bills. It'll be a drag on their financials," he says.

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