AT&T and T-Mobile merger dead as carrier takes $39 billion deal away and T-Mobile faces uncertain future

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0 Comments AT&T and T-Mobile merger dead as carrier takes $39 billion deal away and T-Mobile faces uncertain future

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The Wall Street Journal and Associated Press are reporting that AT&T has dropped its plans to merge with competitor T-Mobile. The news comes on the heels of rumors earlier today that the deal had all but fallen apart. The company will now pay $4b to Deutsche Telekom as a breakup fee, and the two carriers will agree to a roaming deal which will allow devices for each network to work on the other (we’ve already seen some evidence of interoperability). AT&T is citing recent FCC and DOJ moves which called the proposed $39b takeover of T-Mobile into question as the main motivator for the decision.

In a weirdly passive aggressive and vaguely threatening statement AT&T said:

“The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the U.S. wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.

AT&T Inc. bowed to U.S. antitrust authorities and withdrew its $39 billion acquisition of T-Mobile USA, ending a nine-month fight to complete a deal many saw as a long shot and leaving both carriers groping for a way forward.

AT&T will book a $4 billion charge to T-Mobile owner Deutsche Telekom AG for failing to complete the deal and said it would enter a roaming agreement with T-Mobile.

The high-profile defeat came after AT&T had already pulled its application from the Federal Communications Commission and put on hold efforts to fight the Justice Department’s suit to block the deal. In the end, the carrier decided it couldn’t come up with a package of divestitures or other tactics to appease U.S. officials that had deemed it anti-competitive and against the public interest.

The move is a setback for AT&T Chief Executive Randall Stephenson, for whom the merger was the first big deal in his four years in the top job. It was a win for the Justice Department, whose antitrust team took an uncompromising position against the deal in August.

U.S. authorities have approved some big mergers during the Obama administration, including Comcast Corp.’s acquisition of a majority of NBC Universal from General Electric Co. But the Justice Department drew a line with AT&T’s deal, arguing that combining the country’s No. 2 and No. 4 wireless carriers would harm competition, leaving the market too concentrated, and likely raise prices for consumers. The Federal Communications Commission was also highly skeptical.

AT&T needed both agencies’ approval to close the deal. Its collapse means consumers will continue to be able to choose from among four national wireless carriers. A deal, critics said, would have left more than three-quarters of all contract customers in the hands of either AT&T or Verizon Wireless.

T-Mobile subscribers, however, still face an uncertain future. The carrier’s parent, Deutsche Telekom, has made clear it wants to exit the sluggish U.S. market.
Meanwhile, AT&T had seen T-Mobile’s spectrum holdings and thousands of cellphone towers as a quick solution to help ease the well-publicized strains on its network. It will now have to find other ways to improve its network.

Both partners are now back to square one in their strategic plans. AT&T is expected to look to buy spectrum from other carriers and to press the government for auctions of more rights to the airwaves in order to shore up its network in places like New York City and San Francisco. Deutsche Telekom, meanwhile, is expected to look for other buyers of its U.S. assets, which include T-Mobile’s national cellular network and its 33.7 million customers.

Analysts think it will be difficult for Deutsche Telekom to be able to find another buyer willing to shell out what AT&T agreed to pay. The company was in talks with No. 3 wireless carrier Sprint Nextel Corp. before the deal with AT&T was announced, people familiar with the matter have said. But a merger between Sprint and T-Mobile could face some of the same antitrust concerns as AT&T did.

Deutsche Telekom has indicated it doesn’t want to make the investments needed to keep T-Mobile competitive. Now, it will have to compete in an increasingly daunting environment.
Unlike Sprint, Verizon Wireless, and AT&T, T-Mobile isn’t building its own next-generation high-speed network. It’s also the only national carrier not selling Apple Inc.’s iPhone, a shortcoming it says has made it harder to win the lucrative customers that sign contracts.

In the past year, T-Mobile has adapted by placing a heavy emphasis on picking up customers who want a smartphone but don’t want to sign a two-year contract. In the first nine months of 2011, T-Mobile gained 826,000 no-contract prepaid customers.

The deal’s failure is a setback for AT&T’s top executives, who exuded confidence about the deal beginning with its announcement on March 20. For Mr. Stephenson, AT&T’s CEO, the bid for T-Mobile was the biggest gamble in a tenure devoid of the sort of blockbuster deals that were a hallmark of his predecessor, Ed Whitacre. Mr. Whitacre created today’s AT&T over more than a decade of deal-making that pieced together fragments of Ma Bell and rolled up several wireless companies.

AT&T has also benefited as other carriers have from the uncertainty around T-Mobile’s future. The Deutsche Telekom unit saw its contract customer base shrink by 849,000 subscribers in the first nine months of the year. AT&T’s rose by 712,000 over the same period.

AT&T said buying T-Mobile would allow it to extend its high-speed mobile network into more of rural America, striking a chord in Washington. AT&T lined up supporters among governors, members of Congress and interest groups.

Yet AT&T apparently failed to anticipate concerns of antitrust officials and regulators about growing market concentration in the wireless industry.

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