The US Department of Justice (DoJ) has moved to block the sale of T-Mobile USA by Deutsche Telekom to AT&T. The move was justified by the DoJ's expectation that the merger of AT&T Mobility and T-Mobile USA would lead to less choice, higher prices and reduced innovation. AT&T plans to oppose the lawsuit filed by the DoJ in order to pursue the acquisition. The FCC has yet to rule on the deal, but it appears highly likely it will back the DoJ’s position. A number of telecom operators were against the deal, led by Sprint Nextel. However, several major technology companies supported AT&T, including Microsoft, RIM, Facebook and Yahoo!. The acquisition is not totally lost yet, but it looks like any deal may require large parts of T-Mobile (or AT&T) to be sold.
The deal was first announced on 20 March for USD 39 billion ( EUR 28 billion). The agreement includes a break-up fee of USD 3 billion plus spectrum and roaming rights for T-Mobile, which could bring the total value of the fee to USD 6-7 billion. If the deal cannot go ahead in any form a year after the agreement, then AT&T is obliged to pay the fee. The first reaction on the stock market was a drop in the share prices of AT&T and DT, while Sprint’s stock rose.
The DoJ’s formal argument, that the merger would lead to reduced competition, is challenged by AT&T with the argument that at a local level, various small players are still active. However, in the US mobile is largely a national product, with the four national providers AT&T, Verizon, Sprint and T-Mobile accounting for around 90 percent of the market. In addition, T-Mobile fights on price, with tariffs well below those of AT&T.
In addition to the feared loss of jobs, there is another argument against the merger: the deal will not create any spectrum. AT&T argues that the acquisition would give it national coverage and extra spectrum, allowing it to provide better services. The company positions itself as a protector of consumer interests, but this is ironic for a company that gets a great deal of criticism from consumer rights groups. By merging two companies, no additional spectrum is created; an auction is needed to do that. AT&T could spend the USD 39 billion on its own network rather than buying a competitor, and improve its coverage significantly. This also avoids the elimination of an important competitor, which keeps prices low.
The question is what will the future bring on the American mobile market. AT&T and Verizon are gaining ground at the expense of Sprint and T-Mobile. A merger of the latter two seems obvious, but is hampered by their different network technologies. AT&T and T-Mobile use GSM standards, while Sprint and Verizon use CDMA. The DoJ’s arguments appear to rule out any further consolidation, unless it concerns local players. Roaming agreements could solve the coverage problems, as could network sharing and wholesale-only networks. LightSquared has based its business model on this and is building a LTE network for wholesale services. Sprint’s partner Clearwire is also active in this area providing MVNO agreements. This idea is also gaining traction outside the US, especially in outlying areas (of which the US has plenty). Recently BSNL proposed the joint deployment of a network to serve remote areas in India. The Kenyan government is also working on a plan to roll-out a national LTE network, on which the mobile operators could rent capacity. Russia’s largest mobile operators are working on a similar plan for LTE with the Wimax operator Yota. While the market dynamics may be different in these countries, there is still a clear trend towards network sharing.
For Deutsche Telekom, the DoJ decision is a disappointment, as it wants to exit the US market and focus on Europe. It will have to wait and see if AT&T can save the deal, but for the moment the EUR 18 billion destined for debt reduction and share buybacks in the first half of 2012 likely won’t be possible. At the same time T-Mobile USA remains for sale, and other candidates could emerge, such as Google or Apple, the joint cable operators (currently resellers of Clearwire) or a private equity investor. An IPO for T-Mobile USA is also a possibility, and the company will continue to look for cooperation agreements, most likely with Sprint, Clearwire (which is hoping to switch from Wimax to LTE) and LightSquared.
There is also the issue of how will this affect DT as a group. Apart from the possibility the EUR 5 billion share repurchase may not go ahead (too bad for shareholders) and the company’s debt won’t be reduced by the planned EUR 13 billion anytime soon, the group faces the question: what now? Is there enough room within the group still to invest? Will other parts of the company, such as T-Mobile Netherlands, be put up for sale? One thing is certain: speculation about T-Mobile USA and other parts of DT will be making the headlines still for some time to come.
