The boards of both companies voted on Wednesday to approve the deal, which will see Deutsche Telekom hold 74 percent and MetroPCS 26 percent in the combined entity.
The merger marks a long-awaited consolidation in the U.S. mobile market, in which the fourth-largest mobile carrier Deutsche Telekom's T-Mobile aims to get the scale it needs to compete with AT&T and Verizon.
Last year, U.S. regulators scuppered a planned $39 billion tie-up between AT&T and T-Mobile on the grounds it would have led to higher consumer prices and hurt competition.
The MetroPCS deal is effectively a reverse merger, in which smaller MetroPCS, which is listed in the U.S, will buy T-Mobile U.S.
The companies said the deal would be "structured as a recapitalization" in which MetroPCS will declare a 1 for 2 reverse stock split and make a cash payment of $1.5 billion to its shareholders.
Afterwards, the new company will remain listed in New York, which analysts said would allow Deutsche Telekom to benefit from higher stock market valuations in the U.S. via what is effectively a spin-off of T-Mobile USA.
It will also help Deutsche Telekom lessen the burden of investing in the U.S. by making the local unit more independent, and give the former German monopoly a liquid asset it can sell down if it wants to exit the U.S. eventually.
U.S. regulators must still approve the deal, and the companies said closing was expected in the first half of 2013.
The combined company, which will be called T-Mobile and led by current boss John Legere, will have 42.5 million subscribers and pro forma revenues in 2012 of $24.8 billion.
In contrast, third-largest operator Sprint had 56 million subscribers at the end of the second quarter, Verizon had 94 million while AT&T had 105 million.
Braxton Carter, the current chief financial officer of MetroPCS, will become the CFO of the new company.
Once Deutsche Telekom's strongest growth engine, T-Mobile USA has been losing customers to bigger and smaller carriers in recent years. It has lagged behind in upgrading to high-speed wireless services known as 4G and has been unable to get a deal with Apple Inc. to sell its wildly popular iPhone available at its three bigger competitors.
"This is not a replay of a debacle that people have seen in the past. We will not smash together two networks with differing technology," said Legere on a call with analysts.
Legere also said T-Mobile expected minimal customer losses during the network rationalization, which is slated to be completed by the end of 2015.
Deutsche Telekom said cost synergies from the combined company would have a net present value of $6-7 billion, and after 2017 synergies would be worth $1.2-1.5 billion annually.
It added that it was targeting an earnings before interest, tax, depreciation and amortization (EBITDA) margin of 34-36 percent for the new company by 2017, compared with T-Mobile USA's adjusted EBITDA margin of 27.7 percent in the second quarter of this year.
MetroPCS shares, which rose 17 percent on Tuesday after it emerged that talks were underway with Deutsche Telekom, were down almost 6 percent on the New York Stock Exchange.
Deutsche Telekom shares were up 0.7 percent at 1438 GMT, outperforming a flat German blue chip index in thin trading due to a bank holiday.
Sprint's shares were down 1.4 percent, while those of Leap Wireless, another smaller wireless carrier also mooted as a takeover target, fell nearly 15 percent.
Morgan Stanley and Lazard were financial advisors to Deutsche Telekom. Wachtell, Lipton, Rosen & Katz, Cleary Gottlieb Steen & Hamilton LLP, K&L Gates, and Wiley Rein LLP were legal counsel.
J.P. Morgan and Credit Suisse advised MetroPCS, while Evercore Partners advised the special committee of the board of directors of MetroPCS.
~ Harro ten Wolde in Frankfurt and Liana Baker in New York; Writing by Leila Abboud; Editing by Elaine Hardcastle, Jane Merriman and Mike Nesbit
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