TA Associates and Madison Dearborn Partners have co-led a $738 million minority investment in MetroPCS Communications Inc., a Dallas-based wireless communications services provider. Most of the capital will be used to fund a tender offer for shares from existing stockholders, although $50 million takes the form of “new” Series E equity. TA and Madison Dearborn each contributed $300 million, with shared limited partners providing the remainder.
The deal gave MetroPCS a $3 billion enterprise value and $2.2 billion equity value, which means that the buyers received a 33.3% stake. It also means that past private equity supporters of MetroPCS have experienced strong returns, despite having bought into a pre-revenue communications company just before the communications market collapsed.
MetroPCS was founded in 1994 by Roger Linquist, who wanted to provide wireless communications services with a fixed-rate prepaid plan in select metropolitan markets. It was initially bootstrapped by Linquist and other company executives, but over the next two years would raise around $18 million in Series C funding from Accel Partners, Battery Ventures, One Liberty Ventures (now Flagship Ventures) and Primus Venture Partners. That deal was sold at $3.33 per common share, or $2.16 per common share for the firms that exercised all available warrants.
The company’s next few years, however, were consumed by a legal battle with the Federal Communications Commission. MetroPCS was deemed the high bidder in a May 1996 FCC auction for PCS spectrum licenses, but was not actually issued the licenses until Jan. 1997. In the meantime, the FCC ran three more such auctions, thus severely devaluing the licenses that MetroPCS already had paid for. The result was that MetroPCS could not get financing to support its license purchases, let alone build out its network. It complained loudly, and ultimately filed for Chapter 11 bankruptcy protection to restructure its debt with the FCC. It emerged from those proceedings in October 1998.
“It was basically like putting all of our plans in a holding pattern for two years,” says a company source who prefers to remain anonymous.
In late 2000, MetroPCS raised $350 million in tranched-out Series D funding at a price of $9.40 per share. New participants included M/C Venture Partners, Whitney & Co., Columbia Capital, GM Pension Plan, Clarity Partners and INVESCO. It then began making infrastructure acquisitions and building out networks in metropolitan areas like Atlanta, Miami, San Francisco and Sacramento.
It then filed for a $250 million IPO in March 2003, which priced at $17 per share later that year. Before the company could begin trading on the Nasdaq, however, certain accounting inconsistencies were discovered, and the entire IPO was scrapped.
The most recent transaction with TA and Madison Dearborn was basically necessitated by the IPO’s failure, and an intervening $230 million purchase of additional spectrum-in Detroit and Dallas-from Cingular. The purchase price on the tender offer was $23.67 per share, which gave Series C stockholders a return of approximately 10x, and Series D stockholders a return of approximately 3x. A couple of existing investors sold out completely via the tender, although most retained an ownership position.
“This is a company that is growing nicely with a differentiated product, a very low-cost operating model and good margins,” said Kevin Landry, managing partner of TA Associates. “They are in some very attractive markets, and will be able to take on new ones.”
Mellon Bank served as the tender agent, while the deal formally closed in the fourth quarter.
MetroPCS does not have any current plans to re-file for an IPO, although the company source acknowledges that it will have additional growth capital needs. It also has not been approached with any acquisition offers, although telecom companies like Verizon could be eventual $4 billion bidders.