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AT&T Will Have To Fight The Government For T-Mobile
When AT&T (NYSE:T) proposed to acquire Deutsche Telekom's (Nasdaq:DTEGY) U.S. subsidiary T-Mobile and combine the #2 and #4 wireless service providers into the #1 provider, it seemed like a bold and risky move. The risk on this deal has just ratcheted upward in a major way, as the Department of Justice has dug in its heels and filed suit to block the deal on antitrust grounds. The high break-up fee that AT&T owes DT if the deal falls through gives the company strong incentive to fight this one out, but the odds of success are not looking great.
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Department of Justice Itching for a Fight
The Department of Justice is adamant that it does not want this deal to go through. Keep in mind, the FCC just asked AT&T for more information about a month ago and by all accounts the agency is not even close to finishing its review of the transaction. The Department of Justice doesn't seem to care, though, and has already decided to oppose this deal through the courts.
What does this mean for AT&T? Sometimes a lawsuit is what it takes to get two parties talking seriously about compromise, and it is not unprecedented for the DOJ to use antitrust legal action as a means of wringing concessions out of an acquirer. On the other hand, the fact that the U.S. government doesn't feel it needs to hear a final report from the FCC suggests that it thinks it has all the facts it needs - not a good sign for AT&T.
What Now for AT&T?
It would frankly beggar belief that AT&T wouldn't at least approach the government and attempt to discuss concessions that would lead them to dropping their opposition. While any such concessions would certainly weaken some of the economic benefits of the deal, it would make sense if AT&T's internal plans were already scaled to include best case, base case and worst case assumptions regarding potential givebacks. In other words, the deal likely would still make sense with concessions up to a certain point.
At the same time, AT&T has plenty of reason to fight. If the deal collapses, AT&T owes Deutsche Telekom $3 billion in cash and further givebacks worth another $3 billion in spectrum and roaming agreements. What's more, sometimes companies fight the government and win - Oracle's (Nasdaq:ORCL) successful battle for Peoplesoft being an oft-cited example.
The Fallout
Nobody whined about the AT&T-T-Mobile deal more than Sprint Nextel (NYSE:S) CEO Daniel Hesse, who claimed the deal would stifle competition and innovation - never mind the fact that Sprint has struggled when it comes to innovating or competing with AT&T and Verizon (NYSE:VZ). Seeing this deal fall apart would certainly delay Sprint's slide towards irrelevance, though it might also preclude a merger between Sprint and T-Mobile (which Sprint has been rumored to consider from time to time).
Breaking this deal would also be beneficial for the tower companies (American Tower (NYSE:AMT), Crown Castle (NYSE:CCI) and SBA Communications (Nasdaq:SBAC)) as a stronger AT&T would likely wring better concessions out of these companies in the future. Elsewhere, Brightpoint (Nasdaq:CELL), a distributor of mobile gear and a logistics provider to wireless companies, can perhaps now be more optimistic about keeping its sizable T-Mobile business (business it probably would have lost eventually in the AT&T-T-Mobile deal).
It's not so clear what this might mean for MetroPCS (NYSE:PCS) or Leap Wireless (Nasdaq:LEAP). They may still end up as targets for Sprint Nextel, but the AT&T-T-Mobile could have actually been a modest positive for them as AT&T likely wouldn't be interested in competing much in pre-paid or value-priced markets.
The Bottom Line
Given the apparent aggressiveness from the Department of Justice in fighting this deal, it's hard to say that the odds of success for AT&T are more than 50-50 (or even that high). This is certainly a setback for Deutsche Telekom and its efforts to find an elegant exit from U.S. wireless (and avoid sinking even more billions into cap-ex), though the break-up fee will ease some of the pain. For AT&T it is also a setback - this is a deal that would offer the company some real advantages as it competes with Verizon. AT&T is not going to wither away just because it cannot buy T-Mobile, but investors should be prepared for the company to fight this one out as long as it makes economic sense to do so. (For additional reading, take a look at How To Pick The Best Telecom Stocks.)
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Department of Justice Itching for a Fight
The Department of Justice is adamant that it does not want this deal to go through. Keep in mind, the FCC just asked AT&T for more information about a month ago and by all accounts the agency is not even close to finishing its review of the transaction. The Department of Justice doesn't seem to care, though, and has already decided to oppose this deal through the courts.
What does this mean for AT&T? Sometimes a lawsuit is what it takes to get two parties talking seriously about compromise, and it is not unprecedented for the DOJ to use antitrust legal action as a means of wringing concessions out of an acquirer. On the other hand, the fact that the U.S. government doesn't feel it needs to hear a final report from the FCC suggests that it thinks it has all the facts it needs - not a good sign for AT&T.
What Now for AT&T?
It would frankly beggar belief that AT&T wouldn't at least approach the government and attempt to discuss concessions that would lead them to dropping their opposition. While any such concessions would certainly weaken some of the economic benefits of the deal, it would make sense if AT&T's internal plans were already scaled to include best case, base case and worst case assumptions regarding potential givebacks. In other words, the deal likely would still make sense with concessions up to a certain point.
The Fallout
Nobody whined about the AT&T-T-Mobile deal more than Sprint Nextel (NYSE:S) CEO Daniel Hesse, who claimed the deal would stifle competition and innovation - never mind the fact that Sprint has struggled when it comes to innovating or competing with AT&T and Verizon (NYSE:VZ). Seeing this deal fall apart would certainly delay Sprint's slide towards irrelevance, though it might also preclude a merger between Sprint and T-Mobile (which Sprint has been rumored to consider from time to time).
Breaking this deal would also be beneficial for the tower companies (American Tower (NYSE:AMT), Crown Castle (NYSE:CCI) and SBA Communications (Nasdaq:SBAC)) as a stronger AT&T would likely wring better concessions out of these companies in the future. Elsewhere, Brightpoint (Nasdaq:CELL), a distributor of mobile gear and a logistics provider to wireless companies, can perhaps now be more optimistic about keeping its sizable T-Mobile business (business it probably would have lost eventually in the AT&T-T-Mobile deal).
It's not so clear what this might mean for MetroPCS (NYSE:PCS) or Leap Wireless (Nasdaq:LEAP). They may still end up as targets for Sprint Nextel, but the AT&T-T-Mobile could have actually been a modest positive for them as AT&T likely wouldn't be interested in competing much in pre-paid or value-priced markets.
The Bottom Line
Given the apparent aggressiveness from the Department of Justice in fighting this deal, it's hard to say that the odds of success for AT&T are more than 50-50 (or even that high). This is certainly a setback for Deutsche Telekom and its efforts to find an elegant exit from U.S. wireless (and avoid sinking even more billions into cap-ex), though the break-up fee will ease some of the pain. For AT&T it is also a setback - this is a deal that would offer the company some real advantages as it competes with Verizon. AT&T is not going to wither away just because it cannot buy T-Mobile, but investors should be prepared for the company to fight this one out as long as it makes economic sense to do so. (For additional reading, take a look at How To Pick The Best Telecom Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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