AT&T Said to Misread U.S. Signals Before T-Mobile Deal Blocked

On the morning of Aug. 31, AT&T Inc. (T) Chief Executive Officer Randall Stephenson said in a television interview that he expected his company’s bid for T-Mobile USA Inc. to get government approval by the first quarter of 2012.

An hour later, his lawyers received a call from the U.S. Justice Department and were told the government was suing to block the $39 billion transaction, a person familiar with the matter said. The suit halted the biggest deal of the year and drew a line in the sand on antitrust policy that may affect pending acquisitions.

The sudden turnaround occurred because the Justice Department came to a meeting the day before looking for AT&T to lay out a game-changing national remedy to eliminate what it saw as the anticompetitive defects in the proposed merger, and that didn’t happen, said another person involved in the meeting. AT&T was under the impression that it would have more time to present ideas that would assuage the government’s reservations about the deal, another person involved in the discussions said.

The Justice Department concluded the companies on the other side of the table weren’t responding to concerns that the deal would hurt competition and raise consumer prices in the wireless phone market, a person familiar with the decision said.

Skepticism in the antitrust division had been building for weeks as a technical review of national and local markets showed the merger to be highly anticompetitive, said the person, who asked not to be identified, as did all others quoted anonymously, because the talks were confidential.

Justice Department Talks

Against that backdrop, 40 people gathered around a wooden table in a third-floor conference room at the Justice Department on Aug. 30, the day before Stephenson’s televised prediction that the deal would be approved. They included representatives of AT&T, T-Mobile, a unit of Bonn-based Deutsche Telekom AG (DTE), the Justice Department and the Pennsylvania attorney general, the person said. Officials from several state attorneys general offices, including California and New York, listened in by telephone, two of the people said.

Their primary purpose was to brief the acting chief of the antitrust division, Sharis Pozen, said one of the people. The meeting was also called to review the merger’s effect on competition after previous sessions focused on so-called economic models, a person who attended said.

AT&T and T-Mobile’s position on the merger’s benefits was outlined by four people, while Justice Department lawyers interjected questions that they regarded as thoughtful rather than confrontational, one of the people said.

AT&T has said it would keep low-cost T-Mobile subscription plans if the deal is approved.

Possible Divestitures

At the end of the hour-and-half presentation, Pozen said she was concerned that merging the two companies would leave local and national wireless markets too concentrated, the person said. She also expressed reservations about shrinking the market from four major companies to three -- AT&T/T-Mobile, Verizon Wireless and Sprint Nextel Corp. (S), the person said.

AT&T and T-Mobile representatives said they wanted to discuss with a smaller group, at a later meeting, possible divestitures of customers, network and spectrum in regional markets that might allow the deal to go forward, according to one person.

Justice Department officials viewed such an approach, which had been discussed at previous meetings, as failing to address their concerns about preserving a strong fourth competitor that serves the national wireless market, another person said.

No Idea

AT&T’s Stephenson, his lawyers and others involved in the acquisition had no idea those reservations would lead to a lawsuit being filed the next day, the people familiar with their mindset said.

“We are deep into the analysis with the Department of Justice, and it’s all the questions and data gathering you might expect,” Stephenson had told CNBC’s “Squawk Box” at 8:39 a.m., about an hour before the company’s lawyers were advised of the complaint.

“The news caught everybody by surprise,” said Steve Largent, president and CEO of CTIA-The Wireless Association, which hadn’t taken a position on the transaction. “AT&T was in the middle of explaining and detailing the merger that was being proposed when the Justice Department filed,” Largent said. CTIA includes AT&T, T-Mobile and Sprint Nextel Corp. among its members.

Jessica Smith, a Justice Department spokeswoman, declined to comment on the details of the meeting or the decision as did Brad Burns, an AT&T spokesman in Dallas and T-Mobile spokeswoman Anna Friedges.

‘Pulled The Trigger’

“As soon as they decided, they pulled the trigger,” said Harold Feld, legal director of Public Knowledge, a Washington- based consumer group that opposes the deal.

Pozen and her team made the final decision to sue after the Aug. 30 meeting, convinced AT&T wasn’t going to propose a remedy that could fix what they viewed as the scope of the antitrust problem, the person said.

The move was approved by Associate U.S. Attorney General Thomas Perrelli and Deputy U.S. Attorney General James Cole, the department’s second-highest ranking official. U.S. Attorney General Eric Holder recused himself from the AT&T review, according to Justice Department spokeswoman Tracy Schmaler, who declined to provide the reason.

The White House wasn’t involved in the decision, White House press secretary Jay Carney said yesterday at a news briefing. “This is a law enforcement action.”

Serious Concerns

Pozen said at a news conference on Aug. 31 after the filing that the department had consistently told AT&T it had serious concerns about the transaction.

“We have been in constant dialogue with the parties, exploring their arguments, exploring the materials they have provided, asking questions, engaging fully with them,” Pozen said.

AT&T, which said it will challenge the lawsuit, is seeking to meet again with Justice Department officials to propose remedies that might allow the deal to go through, according to three people familiar with the company’s position.

Pozen said at the news conference that the department’s “door is open” for further discussion.

“It is true that you can always settle a case, but the Justice Department doesn’t use litigation as a settlement tactic,” said Public Knowledge’s Feld. “This merger creates dangerous levels of concentration in 97 of the top 100 markets-- there isn’t a cure for that. It’s not like you can sell Chattanooga and give up a few licenses in Milwaukee,” he said.

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

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

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

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