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* ISS advice to vote "no" may sway index funds -analyst
* Deal could succeed if it cuts debt by $3 bln-$4 bln-analysts
* Eagan Jones advises vote for deal; Glass Lewis yet toreport
* Shareholders sue to block the April 12 vote
* MetroPCS shares rise more than 4 pct
By Sinead Carew and Harro Ten Wolde
NEW YORK/FRANKFURT, March 28 (Reuters) - Deutsche Telekom AG will likely be forced to sweeten the terms of itsdeal with MetroPCS Communications Inc after proxyadvisory firm ISS recommended that shareholders vote against theproposed transaction, according to analysts.
MetroPCS shares rose as much as 4.8 percent to a sessionhigh of $11.04 on Thursday in New York after ISS said late onWednesday that it was backing the efforts of two big MetroPCSshareholders to block the company's proposed merger withT-Mobile USA, Deutsche Telekom's U.S. unit.
ISS, also known as Institutional Shareholder Services,complained about the negative market response to the deal, alower equity split than justified for MetroPCS, and thecompany's potential to thrive as a stand-alone company.
Paulson & Co, the biggest MetroPCS shareholder, and anotherbig holder, P. Schoenfeld Asset Management, had both committedto vote against the deal on concerns about the valuation and theamount of debt being assigned to the combined company.
Even so, another big shareholder, Madison Dearborn, had putits support behind the deal.
Analysts said the negative recommendation from ISS was ablow against Deutsche Telekom's current offer, whichshareholders are set to vote on at a special meeting April 12.
"In our view, this is a very significant development asindex funds tend to follow ISS' lead," said Jennifer Fritzsche,an analyst at Wells Fargo.
Deutsche Telekom said in response to the ISS report that itstill sees the existing merger agreement as beneficial toitself, MetroPCS and both companies' shareholders.
MetroPCS said the ISS report "contains material flaws andreaches the wrong conclusion." It also noted that Egan Jones, asmaller proxy firm, advised its clients to vote for the deal.
Shareholders are still waiting for the recommendation ofanother proxy advisory firm, Glass Lewis, which is expected toissue a report on the deal this week.
A group of shareholders led by the Merger Fund sued thecompany in federal court on Thursday, seeking an injunction tohalt the planned shareholder vote. It contends that the companydid not properly explain the deal so shareholders did not haveenough information to vote. They also complained about thedeal's valuation.
MetroPCS said it intends to vigorously defend itself againstthe lawsuit. Representatives for T-Mobile USA were notimmediately available for comment on the lawsuit.
HEAVY DEBT LOAD
Macquarie analyst Kevin Smithen said Deutsche Telekom mightwait until both firms make their recommendations before makingany changes. Smithen raised his price target for MetroPCS stockto $13.50 from $12 on Thursday as he expects the ISSrecommendation to trigger changes to Deutsche Telekom's offer.
Smithen said if Deutsche Telekom reduces the proposed debtlevel for the new company by a range of $3 billion to $4billion, it would be enough to win shareholder support.
The biggest gripe MetroPCS shareholders have with the dealis a proposed debt load of $21 billion, according to analystsand investors.
Analyst Jonathan Chaplin of New Street Research saidshareholders would likely push for less onerous terms on thedebt and for governance changes as well as lower debt levels, before they would vote for the deal.
"We believe the transaction has strong strategic andfinancial merits; however, we have argued that the terms need tobe amended," Chaplin said.
T-Mobile USA, the No. 4 U.S. mobile provider, and itssmaller rival MetroPCS want to pool their spectrum resources andnetworks in order to compete better with bigger rivals such asVerizon Wireless, AT&T Inc and Sprint Nextel.
Under the terms of the reverse-merger announced in October,Deutsche Telekom would end up with a 74 percent stake in thecombined company, and MetroPCS would declare a 1-for-2 reversestock split and pay $1.5 billion in cash to its shareholders.
If the deal collapses, it would be a huge blow for DeutscheTelekom, since in 2011 it had to abandon its plan to sellT-Mobile USA to AT&T for $39 billion because of opposition byregulators.
In the roughly nine months it took for that deal tocollapse, T-Mobile USA lost many customers, having beendistracted from its core business.
On top of these issues, the companies are expected to soonface tougher competition from an emboldened Sprint, which hasagreed to sell 70 percent of its shares to Japan's SoftBank Corp for $20 billion.
P. Schoenfeld Asset Management LP, which says it owns about2.5 percent of MetroPCS, is leading a proxy battle against thedeal. Paulson & Co has a 9.9 percent stake, and Madison Dearbornowns about 8.3 percent of MetroPCS shares, according to the mostrecent public disclosures.
Since Oct. 1, the day before reports emerged that MetroPCSand Deutsche Telekom were in talks, MetroPCS shares slid as muchas 19 percent to a recent closing low of $9.33 on Jan. 8 - theday after MetroPCS reported a decline in total subscribers forthe quarter ending Dec. 31, 2012.
On Thursday, MetroPCS shares rose 37 cents, or 3.5 percent,to close at $10.90 on the New York Stock Exchange.
