German telecom giant Deutsche Telekom (OTC:DTEGY) has been trying for years to figure out a strategy for its U.S. business T-Mobile. That dilemma may be at an end now, as the company has agreed to sell T-Mobile to American rival AT&T (NYSE:T) in a $39 billion deal that combines cash and stock.

TUTORIAL: The Industry Handbook: The Telecommunications Industry

Terms of the Deal
In a surprising move, AT&T announced that the two companies had reached an agreement whereby AT&T will pay $25 billion in cash and $14 billion in stock for Deutsche Telekom's T-Mobile subsidiary, the #4 player in the U.S. wireless space with roughly 34 million total subscribers. Interestingly, AT&T will not be taking on any of the debt associated with T-Mobile.

At the stated price, AT&T is paying about 7x T-Mobile's trailing EBITDA - a premium to Sprint Nextel (NYSE:S) and Clearwire (Nasdaq:CLWR) (which has negative EBITDA), but in line with MetroPCS (NYSE:PCS) and Leap Wireless (Nasdaq:LEAP). (For related reading, see A Clear Look At EBITDA,)

The Logic of the Deal
It will probably take a year or more for this deal to close, but if it does AT&T will become the #1 wireless provider in the United States. Not only are those subs valuable to AT&T, but the deal helps addressed some of the company's spectrum needs as well. The deal will also give AT&T certain operating synergies, not only be eliminating duplicate functions and personnel, but also giving the company greater bargaining power with vendors.

For Deutsche Telekom, this deal provides both a decent return and a graceful exit strategy. DT acquired T-Mobile largely through deals done at the height of the wireless buying boom and never managed to craft a strategy that made it a real leader. Moreover, the relentless capital expenditures necessary to stay in the race with AT&T and Verizon (NYSE:VZ) were a near-constant source of concern and consternation for many DT shareholders.

What Now?
Of course, this all presumes that the deal goes through and that is not exactly a slam dunk. Although AT&T apparently feels confident that it can secure regulatory approval (as exemplified with a $3 billion break-up fee), that is no sure thing. Although AT&T made a case in its own press release that there is sufficient competition in the U.S. cellular industry, the FCC has previously commented that there is too little competition and consumer advocates are already howling about this deal. At a minimum, AT&T may be forced to divest spectrum and subscribers and/or build out rural networks to get the go-ahead for the deal.

With this deal, Sprint Nextel had a defining moment. There were rumors that Sprint had been talking to Deutsche Telekom about a deal for T-Mobile, but the break-up fee for the AT&T bid likely makes a counter-proposal nonviable. Instead, it seems Sprint will have to dig deep to really establish itself as the premier value-priced major carrier.

It is uncertain, though if this will really harm the other major players. Verizon cannot be thrilled to see itself surpassed for the #1 position, but AT&T does not seem to be getting any sort of unbeatable leverage against it. Looking at MetroPCS and Leap, this could actually be good news - AT&T has shown little interest in the pre-paid segment, so the removal of T-Mobile as a competitor could be good news.

Of course, it's not just the cell phone operators with a stake. Clearwire has to be concerned about the removal of a potential spectrum acquirer (T-Mobile), and it seems that there was always some hope among DIRECTV (NYSE:DTV) and DISH Network (Nasdaq:DISH) shareholders that AT&T would step in with a bid. With this deal, though, it seems AT&T will be on the sidelines for a while.

The Bottom Line
Given that AT&T is acquiring subs and spectrum at an attractive price, the buy-versus-build dilemma is working well for the company. It was not an exciting company before and it will not be one now, but it is a decent enough idea for income-oriented investors.

For DT, the company can now refocus on Europe and rivals like France Telecom (NYSE:FTE), Vodafone (NYSE:VOD), and Telefonica (NYSE:TEF). While DT can certainly use the extra capital (and the relief of no longer having to spend money on T-Mobile), the company is going to have to prove that it can still produce growth and convince investors that getting smaller is actually getting better. (To learn more about telecom stocks, see Dial Up Choice Telecom Stocks.)

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