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Paulson on T-Mobile: Debt Over Greed

Tickers in this article: AAPL PCS T VZ

Updated to include comment from MetroPCS and T-Mobile and corrected information regarding PSAM proxy.

NEW YORK (TheStreet) - When it comes to opposing the merger of T-Mobile USA and MetroPCS , struggling billionaire hedge fund manager John Paulson of Paulson & Co. says it's about debt, not greed.

In a strongly worded letter on Wednesday, Paulson, a 9.9% shareholder in MetroPCS, said that a characterization of MetroPCS shareholders as 'greedy' by T-Mobile CEO John Legere is inaccurate and fails to address the poor economics of the merger between the wireless providers.

Paulson, a famed merger arbitrageur, notes in the letter that his hedge fund has cast support to 99% of acquisitions among the its holdings.

This one is different as a result of the leverage in the combination of T-Mobile and MetroPCS , and a poor stock conversion that will effectively give T-Mobile a 74% stake in the combined company.

Paulson "strenuously objects to T-Mobile CEO John Legere's characterization of MetroPCS shareholders as greedy because they believe the current terms of the merger are poor for MetroPCS shareholders," wrote the fund in a March 27 letter.

T-Mobile CEO John Legere characterized MetroPCS shareholders opposing the merger as greedy at a conference in New York on Tuesday.

"It will be approved despite the greedy hedge funds that are trying to take a double-dip out of that process," Legere said at the conference.

But some MetroPCS investors disagree. They highlight $15 billion in debt that will be part of the deal.

"MetroPCS shareholders are left with a subordinated minority stake in an over-leveraged equity stub," wrote Paulson & Co. on Wednesday.

Paulson believes that a fair deal would give MetroPCS shareholders an added $5.58 a share for their holdings to go on top of the proposed merger.

The current proposal gives MetroPCS shareholders $4.08 in cash and half of a share of the combined company. MetroPCS valued the total deal at between $16.50 and $18.80 a share in a recent proxy filing.

Currently, MetroPCS shares fell over 1% in Wednesday trading and stand at $10.53, indicating a steep discount to the company's projections.

As MetroPCS's largest shareholder, Paulson maintained opposition to the proposed merger, which will go up for a vote on April 12, after receiving key antitrust approvals earlier in 2013.

P. Schoenfeld Asset Management, another MetroPCS shareholder, said in several press releases that the merger piles too much debt on the combined companies and creates unnecessary risk for existing shareholders. The asset manager is running a proxy campaign to reject the merger proposal in its current structure.

Madison Dearborn Partners, the second largest MetroPCS shareholder with an 8.3% stake, is likely to support the deal. James N. Perry, Jr is currently a director at both MetroPCS and Madison Dearborn.

Legere was in New York on Tuesday to unveil T-Mobile's so-called Simple Choice plan, which will bring the iPhone 5 to customers at a low cost and without the cumbersome contracts offered by the likes of Verizon and AT&T .

T-Mobile's long-expected iPhone plan has been baked into the forecasts of some MetroPCS shareholders who oppose the company's merger.

Those investors highlight merger integration costs and the operational challenges of growing a network to handle increasing smartphone usage as added reason to cut back on the debt of the combined companies.

"We're confident in the proposed combination with T-Mobile and the stockholder value it creates," a MetroPCS spokesperson said.

"The proposed combination is the best strategic alternative for the company and its stockholders."