Behind the Money

Why AT&T/T-Mobile Deal Appears to Be Dead Already

The Department of Justice blindsided AT&T Wednesday by blocking the company’s $39 billion deal for T-Mobile without warning just five months after it was announced, a move that doesn’t bode well for the telecom giant negotiating a compromise with the government, analysts said.

Etienne Franchi | AFP | Getty Image

The swiftness of the move was done to get the two companies back operating on their own before they get too intertwined, analysts and investors said. Plus, the normal type of divestitures needed to make this deal pass are nearly impossible given that the overlap in markets would mean just giving more share to another large player like Verizon , they said.    

“Our regulatory checks suggest that it is unlikely that the DoJ's complaint represents a negotiating tactic to extract additional asset divestitures and conditions from AT&T and that the DoJ and FCC intend to block the transaction,” said David Dixon, an analyst for DC-area firm FBR Capital Markets, in a note to clients. “AT&T faces an uphill battle from here as the DoJ's action and upcoming FCC action suggests a philosophy of ‘too much wireless M&A too soon.’”

If the deal announced in March 2011 is dead for good, that means AT&T will have to pay T-Mobile’s parent, Germany-based Deutsche Telekom , a break-up fee worth $6 billion, made up of a cash payment and spectrum. It also keeps Verizon Wireless as the No. 1 carrier in the country.

“The only path to completing the merger that we see is a large divestiture package,” wrote Keith Moore, a strategist for MKM Partners. “However, given the number of overlapping markets and the fact that the Justice Department filed its suit only five months after the deal was announced, we believe it is unlikely that an acceptable divestiture package can be negotiated.”

The DOJ said in its case that wireless customers would face “higher prices, fewer choices and lower quality products” as a result of the merger. However, the acting antitrust chief, Sharis Pozen, did say “our door is open” to negotiations during a press conference.

“The DoJ highlights that T-Mo competes against AT&T in 97 of the top 100 cellular market areas, representing 50 percent of the U.S. population,” said BMO analyst Peter Rhamey in a note. “In half of these markets, AT&T would have over 40 percent market share and in 15 markets AT&T would have over 50 percent. Interestingly, the DoJ dismissed out of hand any merger benefits without any elaboration.”

Still, Rhamey is holding onto hope that the deal will make it through after significant divestitures.

The irony of all this is that, according to a letter from lobbying group Free Press, AT&T admitted to the FCC that it could deploy its next generation, 4G network to 97 percent of the population by spending $3.8 billion. AT&T had stated this distribution, especially to rural customers, as one of goals of this nearly $40 billion merger. Now, the break-up fee alone will cost them more than that.

“The rapidity of the decision - coming out months before it was expected - indicates the DOJ is absolutely confident,” said Scott Nations, options trader and founder of NationsShares. “There's no hand wringing at the DOJ about this. The market continues to make bets that it's dead.”

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