Too big to swallow

AT&T and T-Mobile USA

  by M.G. | SAN FRANCISCO

IT WAS the one call that AT&T, America’s second-largest mobile-phone operator, had been dreading. On November 22nd Julius Genachowski, the head of America’s Federal Communication Commission (FCC), announced he had recommended to his fellow commissioners that AT&T’s $39 billion bid for T-Mobile USA, a smaller rival, be referred to an administrative judge for review—because he did not consider it to be in the public interest. Mr Genachowski’s move is another nail in the coffin of an audacious transaction that was supposed to propel AT&T into the number one spot in mobile telecoms in America, ahead of its bigger rival, Verizon Wireless.


That the acquisition now seems doomed to fail is hardly surprising. Ever since it launched its bid for T-Mobile USA in March, AT&T has faced a storm of protest from consumer groups and smaller competitors such as Sprint. They have argued that the proposed deal would harm consumers by turning the wireless market in America into what is essentially a duopoly. AT&T has steadfastly pooh-poohed this claim, but it has clearly failed to convince regulators of the merits of its case. In August the Department of Justice (DOJ) launched a lawsuit to block the deal, which it said would “substantially lessen competition in the wireless market”. Now the FCC has given the bid a thumbs down too.
The commission’s opposition to the transaction means it is now highly likely to be scrapped—a move this newspaper has argued for since the transaction was announced. But AT&T doesn’t seem keen to throw in the towel just yet. On November 25th both AT&T and Deutsche Telekom, the owner of T-Mobile USA, said they planned to continue to fight for the deal. AT&T is also seeking to withdraw its request for FCC approval before all of the body’s commissioners can vote on Mr Genachowski’s proposal.
This retreat is deeply embarrassing for AT&T. But the company’s plan seems to be to try and convince the DOJ to give a green light first before taking the deal back to the FCC. AT&T will almost certainly offer to dispose of even more of T-Mobile USA’s assets after acquiring it. It hopes to get the DOJ to agree to the deal rather than having to fight its case in court (hearings are scheduled to begin in February 2012).
The chances of such a gambit working are slim—a fact that even AT&T itself recognises. The company has said it will take a $4 billion charge against its earnings in the final quarter of this year to cover the cost of the break-up fee ($3 billion in cash and $1 billion-worth of wireless spectrum) that it is committed to pay Deutsche Telekom if the merger with T-Mobile USA does not go ahead. It seems, critics of the proposed deal point out, that its chances of being approved are now so slim that the firm’s auditors must have forced AT&T to take the hit to its bottom line now.
All this puts Deutsche Telekom in a tricky position. It would no doubt love to get its hands on AT&T’s money. But T-Mobile USA’s share of the mobile market is slipping further, partly because of doubts about the future of the business. The German company could see itself left with no deal and a seriously weakened American operation. AT&T, however, has an incentive to stretch out the legal proceedings in the hope that it can ultimately get a green light for the transaction—or that Deutsche Telekom will agree to lower its break-up fee to get out of the arrangement quickly.
If the deal is scrapped, analysts argue, T-Mobile USA will have no choice but to look for another partner. Regulators seem keen to preserve at least four large mobile operators in America so a merger with Sprint is unlikely. But T-Mobile USA could cast around for a smaller target, or perhaps seek to work with cable companies that own wireless spectrum.
As for AT&T, it will have to find other ways of getting its hands on the additional spectrum and infrastructure it needs to grow its business. And it may be tempted to bid for firms in other areas, such as television, where it is less likely to fall foul of regulators. Moving on from the T-Mobile deal will not be easy. But it is time for AT&T’s managers to face up to the fact that its failure is inevitable.