By Sophie Sassard and Philipp Halstrick
LONDON/FRANKFURT (Reuters) - Deutsche Telekom AG is looking into improving the terms of a proposed merger of its T-Mobile USA unit with MetroPCS Communications Inc as a last resort to win over shareholders ahead of a vote on the deal next week, two people familiar with Deutsche Telekom's thinking said on Thursday.
The board of the Bonn-based company is divided on whether to sweeten the terms of the cash and share deal to secure approval at a MetroPCS shareholder vote on April 12 and is hoping it could still avoid any change, the people said.
"They have a week to decide and they are working on it at the moment", said a third person who is familiar with MetroPCS's thinking. The people did not wish to be named because the talks are private.
Deutsche Telekom said on Thursday afternoon that it "has no comment as to possible changes to the terms of its agreement with MetroPCS" and that it continues to believe its current proposal was in the best interests of shareholders.
This was a change from the company's comment earlier on Thursday in response to a question about whether the firm was working on sweetening the deal.
A spokesman had initially said: "No, we can flatly deny that.
MetroPCS shares closed 1.5 percent higher at $11.12 on the New York Stock Exchange on Thursday. A spokesman for MetroPCS declined to comment.
Deutsche Telekom's financial advisers, Morgan Stanley and Lazard, also declined to comment.
MetroPCS agreed to the deal in October but Deutsche Telekom is now being forced to find ways to charm MetroPCS shareholders after activist investors holding about 12 percent of MetroPCS stock contested the terms and started wooing others.
Two U.S. analysts said on Thursday that they expected Deutsche Telekom to sweeten the offer by changing the capital structure in order to gain approval for the deal.
The most important change that shareholders will look for is a reduction of the $21 billion in debt that the combined company is expected to have on its books, including $15 billion in inter-company senior secured debt.
"They should just cut the debt by about $6 billion," said New Street analyst Jonathan Chaplin. Macquarie analyst Kevin Smithen said that a debt reduction of $3 billion to $4 billion could salvage the deal for T-Mobile USA.
Chaplin said that Deutsche Telekom cannot afford to walk away from the merger, which would give T-Mobile USA more wireless airwaves in key markets, and create estimated savings of up to $7 billion.
"There's no alternative acquisition that's likely to achieve these objectives," Chaplin said.
Paulson & Co, the biggest MetroPCS shareholder, has said it would vote against the deal. Another big shareholder P. Schoenfeld Asset Management (PSAM), is leading a proxy battle aimed at blocking the deal.
Both firms have complained about the debt issue.
"The biggest problem has been the capital structure and a considerable lack of transparency", said Doug Polley, chief investment officer of rebel investor PSAM during a presentation to other MetroPCS shareholders on Thursday.
"Voting down the proposed deal, even without a revised offer from DT (Deutsche Telekom) or another buyer surfacing, still yields superior value to PCS shareholders", PSAM told shareholders during the presentation.
On top of pressure from activists the companies also face a recommendation from top U.S. investor advisory firms ISS and Glass Lewis for shareholders to vote against the deal.
However, Madison Dearborn Partners, the second-largest shareholder, has thrown its weight behind the deal and smaller advisory firm Egan Jones has backed it as well.
Deutsche Telekom needs a simple majority of shareholders for the deal to pass.
Failure for Deutsche Telekom, which already suffered from the collapse of its 2011 attempt to sell T-Mobile USA to AT&T Inc due to U.S. regulatory opposition, could have big repercussions.
The German telecoms group needs to combine with MetroPCS to beef up its network to try to close the gap with bigger U.S. rivals. The deal could also free up resources to invest in its domestic market.
Under the October deal, MetroPCS shareholders would receive $4.06 per share in cash plus stock equivalent to 26 percent of the combined company. Deutsche Telekom will own the rest.
The combined company would have revenue of $24.8 billion and 42.5 million subscribers, according to company estimates.
Deutsche Telekom shares closed up 2 percent at 8.52 euros on Thursday.
(Reporting by Sophie Sassard in London and Philipp Halstrick in Frankfurt; Additional reporting by Harro Ten Wolde in Frankfurt and Jennifer Saba, Ben Berkowitz and Sinead Carew in New York; editing by Tom Pfeiffer, Mark Potter, David Gregorio and Matthew Lewis)