AT&T on Sunday announced that it had agreed to buy T-Mobile USA from Deutsche Telekom for $39 billion, in a deal that would create the largest carrier in the nation and promised to reshape the industry.
The transaction one of the largest since the onset of the financial crisis is expected to incite a fierce battle in Washington as regulators scrutinise the impact of the deal on competition and consumers. The deal would leave just three major cellular companies in the country: AT&T, Verizon and the much smaller Sprint Nextel.
Under the terms of the deal, AT&T will pay $25 billion in cash and the balance in stock. Deutsche Telekom will gain an 8-per cent stake in AT&T and a seat on the telecom giant's board.
At $39 billion, AT&T would be paying a significant premium to most analysts' estimates for T-Mobile. Bank of America Merrill Lynch valued the subsidiary in December at about $23.2 billion, while a team from JPMorgan Cazenove valued it at about $25.5 billion.
The deal is expected to be a boon for Wall Street with more than half a dozen firms collecting hundreds of millions of dollars in fees.
Some critics denounced the merger within hours of its announcement, saying it would likely lead to higher prices. T-Mobile had offered some of the lowest rates in the U.S., keeping pressure on competitors. While AT&T is expected to honour current contracts, T-Mobile customers may have to pay higher rates once those contracts expire.
Still, AT&T pointed on Sunday to a recent report from the federal Government Accountability Office that said cellular subscription costs fell 50 per cent from 1999 and 2009, a period in which the industry has consolidated.
“Consumers have borne the brunt of the increasingly concentrated market for mobile phone service,'' Sen. Herb Kohl, D-Wis., who heads the subcommittee on antitrust, competition policy and consumers rights, said in a statement. “The explosion of cellphone usage especially smartphones makes competition in this market more important than ever as a check on prices, consumer choice and service.''
AT&T customers, though, could benefit in one notable area: service. Both AT&T and T-Mobile operate on the same technology, known as GSM, so the combination should provide better coverage. That has been a sore point for AT&T, which has been ridiculed for dropped calls and slow data services, especially on Apple's iPhone.
“The carriers network technology fits nicely together so AT&T could redeploy some of T-Mobile's spectrum in short order, helping relieve some of the pressures on its network," said Craig Moffett, an analyst with Sanford C. Bernstein.
The acquisition would give AT&T additional leverage against its main rival, Verizon. The newly combined company bringing together AT&T's 95.5 million wireless subscribers with T-Mobile's 33.7 million customers would account for roughly 42 per cent of all wireless subscribers in the U.S. Verizon has around 31 per cent, said Charles Golvin, a telecom analyst at Forrester Research.. T-Mobile customers would have the option to buy an iPhone, helping AT&T combat the migration of the popular device to Verizon.
Scale will be critical as AT&T continues its aggressive rollout of the next generation wireless network, known as 4G. The carrier has been slower than rivals to deploy the new 4G technology, LTE, than competitors. T-Mobile does not have a 4G technology in place.
Meanwhile, Verizon has already started to sell LTE-enabled devices. At the Consumer electronics show in January, Verizon announced at least a dozen new smartphones and tablet computers that will be compatible with the technology.
The deal requires approval from both the Justice Department and the Federal Communications Commission. It is unclear how regulators will react, but the companies clearly know the deal faces serious regulatory hurdles. Deutsche Telekom was so worried that the transaction would not be approved that it pushed AT&T to agree to a big breakup fee and spectrum as a form of insurance, according to people involved in the deal. The breakup fee in the deal is $3 billion, nearly 8 per cent of the deal's deal value. Typically, such fees are around 5 per cent of the value.
Unlike the merger of Comcast and NBC Universal, which consolidated a transmission company and a content provider, the proposed AT&T and T-Mobile deal is a ‘horizontal merger' that would combine two companies that had been direct competitors.
As part of their assessment, antitrust lawyers must determine whether the deal might undermine efforts to encourage broadband service competition between wireless and landline providers. AT&T and Verizon both control a major segment of the landline market, so by allowing them to dominate wireless services as well, the merger could effectively hurt competition for broadband delivery options.
