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AT&T to Post $4 Billion Charge Against Possible Collapse of T-Mobile Deal

AT&T Inc. (T), whose $39 billion bid for T-Mobile USA is challenged by the U.S. Justice Department, will record one-time costs of $4 billion this quarter to reflect the risks of a collapse of the deal.

AT&T and T-Mobile owner Deutsche Telekom AG withdrew their applications to the U.S. Federal Communications Commission to focus on winning clearance from the Justice Department, the companies said in separate statements today. The pretax accounting costs reflect the potential breakup fees due to Deutsche Telekom, Dallas-based AT&T said.

“What that tells you is AT&T’s auditors have now concluded that the deal is likely to fail and have forced the company to take that charge,” said Will Draper, an analyst at Espirito Santo in London who advises holding Deutsche Telekom shares and doesn’t have a rating on AT&T. The chances of the deal going through are now about 10 percent, down from 25 percent, he said.

The Justice Department sued to block the transaction in August, saying a combination of AT&T and T-Mobile would eliminate one of four national U.S. wireless carriers and hamper competition. FCC Chairman Julius Genachowski this week asked commissioners to send the proposed takeover to an agency judge for a hearing.

Book Value

Deutsche Telekom, based in Bonn, fell 0.6 percent to a seven-week low of 8.69 euros when markets closed in Frankfurt today. AT&T fell 1.9 percent to $27.55 in New York Stock Exchange trading yesterday. The U.S. market is closed today for Thanksgiving.

AT&T’s fourth-quarter net income may reach $3.14 billion, according to the average estimate of eight analysts compiled by Bloomberg before today’s announcement.

The $4 billion accounting charge includes $3 billion in cash and $1 billion in book value of wireless spectrum, AT&T said in its statement. Deutsche Telekom has said it values the total breakup package at as much as $7 billion, including lower charges for its customers to terminate calls on AT&T’s network.

“AT&T Inc. and Deutsche Telekom AG (DTE) are continuing to pursue the sale of Deutsche Telekom’s U.S. wireless assets to AT&T and are taking this step to facilitate the consideration of all options at the FCC and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice,” AT&T said.

‘Rocky Path’

Carol Roos, an external spokeswoman for AT&T, declined to provide details beyond the company statement.

Deutsche Telekom Chief Executive Officer Rene Obermann said as recently as Nov. 10 that the companies will probably be able to maintain a timetable of completing the transaction during the first half of 2012.

“It’s a rocky path that Deutsche Telekom and AT&T have before them,” said Jan Goehmann, an analyst at Norddeutsche Landesbank Girozentrale in Hanover who recommends buying Deutsche Telekom shares. “I can’t imagine they will be able to stick to the original schedule.”

AT&T and Deutsche Telekom plan to renew their attempt to gain FCC approval “as soon as practical,” they said. “This doesn’t mean that anything is over,” said Andreas Fuchs, a spokesman for the German company.

Combining AT&T and T-Mobile, the second- and fourth-largest U.S. wireless providers, would create a new market leader with 134 million customers, dethroning Verizon Wireless. T-Mobile had 33.7 million customers at the end of September. The Bellevue, Washington-based company lost 186,000 contract subscribers last quarter, bringing the losses during the past four quarters to 1.17 million.

VoiceStream Acquisition

Deutsche Telekom, which entered the U.S. a decade ago under then-CEO Ron Sommer by staking $28.5 billion on VoiceStream and Powertel, was considering options for T-Mobile USA after the unit reported profit declines in four of the past five years. Europe’s biggest former phone monopoly trailed rivals in the U.S. in building out a third-generation mobile network and missed out on being able to sell Apple Inc.’s iPhone.

“This has to be bad news for Deutsche Telekom because that breakup fee is bit of a red herring,” said Espirto Santo’s Draper. “They’re still going to have a very, very big problem in the U.S., which is going to cost them maybe $10 billion to fix.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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