AT&T Antitrust Suit Draws Line in Sand That Will Affect Other U.S. Mergers

The lawsuit seeking to block AT&T Inc.’s takeover of T-Mobile USA Inc. shows a more aggressive antitrust stance by the U.S. Justice Department that limits prospects for other big telecommunications deals, antitrust analysts said.

The suit, filed yesterday in Washington federal court, seeks to derail the $39 billion T-Mobile deal, the biggest acquisition announced this year, according to data compiled by Bloomberg. The last transaction the Justice Department challenged whose size even approached the AT&T bid was the 2003 $8.4 billion Oracle Corp.-PeopleSoft Inc. merger.

The T-Mobile deal is the biggest challenged by the Justice Department since it sued in June 2000 to block WorldCom Inc.’s proposed acquisition of Sprint Corp., a deal valued at $152 billion when the companies called off the merger the following month.

With yesterday’s filing, President Barack Obama’s Justice Department departed from its strategy of approving large acquisitions after adding conditions, as it did with Comcast Corp.’s purchase of NBC Universal and Ticketmaster Entertainment Inc.’s merger with Live Nation Inc. Previously, antitrust authorities at the department “backed down,” said Robert Lande, a University of Baltimore law professor.

“They negotiated a compromise,” Lande said. “But this one they said, ‘No, we cannot compromise, this is anticompetitive.’”

‘Anticompetitive’

AT&T intends to fight the litigation, Wayne Watts, the Dallas-based company’s general counsel, said in a statement yesterday. Bonn, Germany-based Deutsche Telekom AG (DTE), which owns T-Mobile, also said it would contest the suit.

The Justice Department said in its complaint that a combination of AT&T and Bellevue, Washington-based T-Mobile would result in “higher prices, poorer quality services, fewer choices and fewer innovative products” for consumers.

“Any way you look at this transaction, it is anticompetitive,” Sharis Pozen, the acting head of the department’s antitrust division, said at a news conference yesterday.

That position will make it harder for companies to make a case with regulators for large, complex mergers in the telecommunications industry, said Henry Levine, a partner at Washington-based law firm Levine, Blaszak, Block & Boothby LLP, which represents large companies in telecommunications cases.

Line in Sand

“It’s a line in the sand,” he said. The suit signals “you cannot buy one of the major players in the market,” he said. A merger between No. 3 wireless carrier Sprint Nextel Corp. (S) and No. 4 T-Mobile might raise similar competition concerns, Levine said. Still, the suit doesn’t signal the Justice Department would oppose smaller acquisitions, he said.

The AT&T challenge isn’t a harbinger of the fate of Express Scripts Inc. (ESRX)’s $29 billion offer for Medco Health Solutions Inc., announced in July, said Marc Schildkraut, an antitrust lawyer with Dewey & LeBoeuf LLP in Washington. That transaction, which would create the biggest U.S. pharmacy- benefits manager, is being reviewed by the Federal Trade Commission, not the Justice Department.

“Medco is a very hard deal but I don’t think there’s a relationship between the two,” he said. “It’s a totally different deal and a total different agency.”

By buying T-Mobile, AT&T would displace Verizon Wireless, which is owned by Verizon Communications Inc. (VZ) and Vodafone Group Plc, as the No. 1 U.S. wireless carrier. Sprint would remain the third-largest. AT&T and T-Mobile compete head-to-head in 97 of the nation’s top 100 mobile-phone marketing areas, according to the Justice Department’s complaint.

‘Significant Shift’

Previously, companies eased government concerns about telecommunications mergers by agreeing to sell operations in the local markets they dominated. With the Justice Department adopting a national perspective, such remedies are less likely to satisfy the government, said attorney Mark Ostrau, a Mountain View, California-based partner at Fenwick & West LLP.

“You can view this as a significant shift in attitude toward telecom consolidation,” he said.

Pozen, the acting antitrust chief, said yesterday that the “door is open” to discuss a remedy with AT&T. Barring a court victory or a willingness to make major divestments, AT&T will have difficulty getting the deal through, said Levine Blaszak’s Levine.

Merger’s Prospects

“The bet at this point would be that the merger does not go through,” he said.

U.S. District Judge Ellen Segal Huvelle has been assigned the case. In 2001, she rejected the department’s efforts to block SunGard DataSystems Inc.’s acquisition of Comdisco Inc.’s computer disaster-recovery business for $825 million. She said the government failed to show the combined company’s relevant market would be limited to services now offered by Comdisco, SunGard and International Business Machines Corp.

The case of AT&T and T-Mobile case is one of the rare instances in recent years where the Justice Department has actively sought to block a merger either through a formal lawsuit or an informal threat to sue. Other instances include H&R Block Holdings Inc.’s bid for 2SS Holdings Inc. and Nasdaq OMX Group Inc. and IntercontinentalExchange Inc.’s offer for NYSE Euronext.

The department sued to keep software maker Oracle from completing its purchase of PeopleSoft. A federal judge rejected U.S. arguments that the deal would give Redwood City, California-based Oracle power to raise software prices and harm competition.

Comcast, NBC

AT&T may have been induced to believe it could win approval of the T-Mobile takeover after the antitrust division let Comcast purchase NBC Universal in January 2011 and allowed Ticketmaster to merge with Live Nation in January 2010, said Lloyd Constantine, an antitrust lawyer with New York-based Constantine Cannon LLP.

Both transactions were approved with conditions designed to preserve competition in their respective industries.

“The Comcast-NBC merger gave them the nerve to try this one, and they found out that enforcement has not been relaxed that much,” Constantine said.

AT&T campaigned to build support for the deal, getting backing from the Communication Workers of America and agreeing to bring back 5,000 call-center jobs to the U.S.

The lawsuit “does give the business community some sense that not everything is negotiable and that there are limits to what the Justice Department is willing to permit, even in an economic downturn,” said Andrew Gavil, a professor who teaches antitrust law at Howard University in Washington.

The case is U.S. v. AT&T Inc. (T), 11-01560, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Jeff Bliss in Washington at jbliss@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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