AT&T Deal May Get a Year of Regulatory Scrutiny Even With Disposal Pledges

AT&T Inc. (T)’s $39 billion purchase of T-Mobile USA, the biggest acquisition worldwide in almost a year, may take a year to gain regulators’ approval even if the carrier pledges to sell assets and expand rural coverage.

The acquisition would push AT&T past its largest rival, Verizon Wireless, to become the biggest U.S. mobile-phone carrier. AT&T and T-Mobile combined have 39 percent of the market, according to research firm EMarketer Inc.

The U.S. Federal Communications Commission and consumer groups may be concerned the deal will reduce competition and consumer choices, pushing up prices. AT&T anticipates regulators will require it to divest wireless spectrum and subscribers as a condition for approval, said a person with knowledge of the situation. A failure to complete the deal would mean AT&T may need to pay to a breakup fee of $3 billion and some spectrum, said two people with knowledge of the matter.

“AT&T-T-Mobile is apt to be scrutinized more thoroughly than any other merger to date by the Obama administration,” said Jeffrey Silva, an analyst with Medley Global Advisors LLC in Washington. “The FCC is expected to come under heavy pressure from consumer advocates, public interest groups and congressional Democrats to block the deal.”

The combination of the second-largest wireless carrier with the fourth-largest is “unthinkable,” Gigi Sohn, president of Public Knowledge, a Washington-based advocacy group, said in a statement. “We know the results of arrangements like this -- higher prices, fewer choices, less innovation.”

Rural Networks

AT&T, based in Dallas, could also be required to build out more rural networks or provide data roaming to rural carriers, increasing the reach of Internet access in the U.S., a goal by President Barack Obama’s administration, said Roger Entner, an analyst at Recon Analytics LLC in Boston.

Robert Kenny, a spokesman for the FCC, and Gina Talamona, a spokeswoman for the Justice Department, which may also scrutinize the deal, declined to comment. Cecelia Prewett, a spokeswoman for the Federal Trade Commission, another agency that reviews acquisitions, also declined to comment.

AT&T rose 32 cents to $28.26 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 3.8 percent this year. Deutsche Telekom jumped 11 percent to 10.67 euros in Frankfurt trading, the biggest gain since October 2008.

‘Terminator’

AT&T CEO Randall Stephenson said the company had been in discussions with Deutsche Telekom for about three months. He didn’t say where talks took place or between whom, specifically. He said AT&T had done its own review and determined that it was likely to get regulatory approval before it proceeded with extensive talks with Deutsche Telekom. The companies said completing the deal may take a year.

The history of AT&T goes back to 1875, when Alexander Graham Bell invented the telephone. The company became the parent of the Bell system, which offered U.S. phone service as a monopoly. The Justice Department broke up AT&T in 1984 into eight so-called Baby Bells, including one that’s grown into what is now AT&T.

“AT&T was broken up and now it’s back with a vengeance,” said Bert Foer, president of the American Antitrust Institute, a Washington-based non-profit researcher that challenges what it sees as abuses of concentrated economic power. “We have to decide if we’re happy with the idea of going back to monopolistic treatment of the telecom industry. AT&T has come back to monopolistic power just like the Terminator.”

Dwarfing Sprint

In addition to surpassing Verizon Wireless, AT&T could leave Sprint Nextel Corp. (S) as a far weaker No. 3 player in the industry, said Rebecca Arbogast, an analyst for Stifel Nicolaus & Co. in Washington. Sprint also held talks with Deutsche Telekom about buying T-Mobile, people with knowledge of the matter said this month.

“The question is whether the government will be satisfied with other ways to maintain competition in the wireless industry and let this deal go through,” Arbogast said.

The Free Press, a media reform group in Washington, said the concentration of the market will lead to higher prices and fewer choices for users and urged regulators to reject the deal.

The FCC said last year concentration is rising among U.S. mobile-telephone providers, a conclusion that AT&T Senior Vice President Robert Quinn in a statement called “a dramatic break” from precedent. The FCC under Chairman Julius Genachowski, a Democrat, has increased scrutiny of wireless carriers for actions such as exclusive contracts with handset makers and fees that may thwart competition.

Spectrum Crunch

Commissioner Michael Copps, a Democrat, said last year that wireless industry concentration had “skyrocketed,” a circumstance he said “should flash a bright caution light for this commission.”

The U.S. House Judiciary Committee said today it will hold a hearing on the acquisition. The committee will look into possible anticompetitive impacts from the combination, Representative Lamar Smith, a Texas Republican who heads the panel, said in a statement.

The potential scrutiny from regulators would have to be weighed against the benefit of delaying a possible exhaustion of available mobile-phone spectrum, said Larry Freedman, a partner at law firm Edwards Angell Palmer & Dodge LLP, which focuses on telecommunications. By combining, AT&T and T-Mobile would be able to share resources, including airwaves.

IPhone Effect

“One of the interesting things that’s going to help them at the FCC is the compatibility of the networks,” Washington- based Freedman said in an interview. “The spectrum crunch would be alleviated because you have complementary networks and the ability to use each other’s spectrum. That could be viewed as a positive.”

With video-capable devices such as Apple Inc.’s iPhone gaining in popularity, the carriers have said they expect their current spectrum allocations to last for another three or four years. President Obama proposed last year almost doubling the airwaves available for smartphones, laptops and other wireless devices to meet demands for mobile broadband services.

Still, the spectrum benefit alone is unlikely to be enough to convince regulators the acquisition won’t harm the industry.

“It is unlikely that AT&T would attempt a deal that they knew would fail; however, we can’t see how they would get this through without massive divestitures and concessions,” Jonathan Chaplin, an analyst at Credit Suisse Group AG in New York, said in a note. “We have never seen a deal with more regulatory risk be attempted in the U.S.”

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net; Todd Shields in Washington at tshields3@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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