The U.S. government’s effort to block the takeover of T-Mobile USA Inc. chokes off AT&T Inc. (T)’s path to an expanded network and wrecks its plan to gain as much as $20 billion in airwaves to help handle surging call volume.
The U.S. Justice Department yesterday sued to block the company’s proposed $39 billion acquisition of T-Mobile USA Inc., calling it a threat to wireless competition. The deal was struck to give AT&T the capacity it needs to ease network congestion, and accelerate the rollout of faster, next-generation network technology -- key pieces of AT&T’s effort to add subscribers and step up earnings growth.
If AT&T fails to gain T-Mobile’s network, some of its 98.6 million customers may defect to rivals to avoid dropped calls and get access to faster services for smartphones and tablets. Besides paying a $3 billion breakup fee, AT&T would also have to transfer some of its spectrum to T-Mobile, further squeezing its network capacity and stalling plans for growth.
“The issue is loss of spectrum,” said Michael Mahoney, a senior managing director at San Francisco-based Falcon Point Capital LLC. “It’s clearly a negative. They’ve been capacity- constrained because of the huge popularity of the iPhone.”
The purchase would have combined the second- and fourth- largest U.S. carriers into the nation’s largest wireless-service provider, helping the enlarged company wring costs and improve margins. Verizon Wireless is the No. 1 wireless service company in the U.S., and Sprint Nextel Corp. (S) is the third-biggest.
When the acquisition was announced March 20, AT&T said it would expand the introduction of its high-speed wireless technology, called Long-Term Evolution, or LTE. At the time, AT&T said it would offer the service to an additional 46.5 million people as part of the deal, helping achieve the Federal Communications Commission goal of making broadband available more widely.
The Justice Department is seeking a declaration that AT&T’s takeover of T-Mobile, a unit of Deutsche Telekom AG (DTE), would violate U.S. antitrust law, according to a complaint filed yesterday in federal court in Washington. The U.S. also asked for a court order blocking implementation of the deal, saying it would crimp competition for wireless services in the U.S.
“There’s no good way to spin this for AT&T,” Craig Moffett, a senior analyst at Sanford C. Bernstein & Co., said in a note to investors yesterday.
AT&T, based in Dallas, said in a statement it plans to “vigorously contest this matter in court.” AT&T spokesman Mark Siegel said the company wasn’t commenting beyond the statement. Deutsche Telekom said it was disappointed by the action.
Cash, Wireless Spectrum
Deutsche Telekom has said that the deal’s failure would leave AT&T liable for a breakup package valued at as much as $7 billion, including the $3 billion in cash, wireless spectrum and reduced charges for calls into AT&T’s network.
In December 2009, AT&T finished last in a Consumer Reports customer survey of the top four U.S. wireless carriers, while Verizon Wireless ranked highest. AT&T shared the bottom spot with Sprint, Consumer Reports said. Later that month, AT&T wireless chief Ralph de la Vega called the company’s mobile performance in San Francisco and New York unsatisfactory.
AT&T’s spectrum and capacity constraints are already “more severe than those of any other wireless provider,” according to Mobilize Everything, a website set up by the merging companies. And as more consumers buy smartphones and tablets, AT&T expects data traffic to increase another eight to 10 times by 2015.
Adding Network Capacity
To keep up, AT&T has raced to add more network capacity in the past several years. This includes expanding its so-called fiber backhaul capacity, used to move calls and data between cell towers that communicate with mobile phones. The company expects as much as 70 percent of its traffic to be sent via fiber backhaul by year-end, up from less than 30 percent at the end of 2010, AT&T said earlier this year.
Still, the company needs more airwaves dedicated to wireless communications, or spectrum -- a limited and expensive resource -- to stay in step with the surge in customer data use and subscriber growth.
T-Mobile’s spectrum is worth $15 billion to $20 billion, said Tim Farrar, founder of Telecom, Media and Finance Associates Inc., a Menlo Park, California-based research firm.
“Spectrum is about half of the value of what they bid,” Farrar said in an interview.
Growth at Risk
If the T-Mobile deal falls through, the company may have to scale back its plans to deploy faster networking technology, Kevin Smithen, an analyst at Macquarie Securities USA Inc., said in an interview. In June, AT&T pledged to invest an additional $8 billion over seven years to integrate the two carriers’ networks and expand LTE technology, which lets mobile devices link to the Web at faster speeds.
Without the acquisition, the earnings boost expected by analysts is also at risk, Smithen said.
“Our concern is AT&T is a very modest revenue-growth company” without T-Mobile, Smithen said. He expected $2 billion in annual improvements in earnings before costs such as depreciation and taxes, which would have increased AT&T’s earnings growth from a percentage in the low single digits to a percentage in the high single digits, he said.
The company also was expected to reduce monthly churn, or the average number of subscribers leaving the service, among T- Mobile customers. A lower rate of defections could widen T- Mobile’s margins to be on par with AT&T’s, Smithen said.
AT&T’s stock may decline to $25 instead of possibly rising to $35 if the merger is completed, Smithen said. The shares fell 21 cents to close at $28.27 at on the New York Stock Exchange.
Deutsche Telekom rose 19.3 cents, or 2.2 percent, to close at 9 euros in Frankfurt trading. The stock has dropped 6.8 percent this year.
While AT&T still might seek to acquire spectrum from other companies, such as Comcast Corp. (CMCSA), Dish Network Corp., Clearwire Corp. (CLWR) or LightSquared Inc., any other deals are now going to be viewed with skepticism because they are likely to face similar regulatory scrutiny, Smithen said.
“It’s going to be difficult for AT&T and Verizon to do any acquisitions now,” he said. “The DOJ is going to take a hard look at whatever they do.”