This Deal is Doomed
Eight months after the surprise Sunday announcement that AT&T intended to acquire T-Mobile USA, and three months after the Department of Justice filed a lawsuit against the proposed deal, FCC Chairman Julius Genachowski revealed Tuesday that he opposes the combination. The Chairman circulated a draft Hearing Designation Order (HDO) amongst the other FCC Commissioners which effectively says that the FCC finds the proposed combination not to be in the public interest.
Assuming the HDO is approved by the other Commissioners, a hearing will be scheduled (not before the DOJ’s lawsuit) wherein an administrative judge will consider the facts. According to a note issued by the Rural Telecommunications Group (RTG) last night, the last time the FCC issued an HDO was when DirecTV and DISH Network were trying to merge; the DBS concerns walked away from that deal rather than fight the inevitable.
In my mind the failure of AT&T and T-Mobile’s efforts to merge has been inevitable all along, but especially following the August 31 filing of the DOJ’s lawsuit (never mind similar moves by Sprint and other opponents); the FCC’s action yesterday just confirms my long-held suspicions. An AT&T spokesperson called the move “Disappointing…”
Disappointing sure, but surprising? No way, although clearly AT&T believed it could push the merger through when it announced the deal last March. My initial response back then was:
“The announcement raises a plethora of issues that will certainly be discussed and debated for the next year or so as AT&T works to get approvals. First and surely foremost is the antitrust review; it remains highly speculative to assume this deal sails through. The FCC and other industry watchdogs have already noted that the wireless industry has devolved into a powerful duopoly and we’ve also been writing on the topic here in our blog. Expect heated debate and ultimately, should approval be granted, major concessions (read divestitures) on the part of AT&T. That said, AT&T has agreed to a particularly hefty breakup fee to DT/T-Mobile should the deal not go through, including a $3b cash payment as well as the transfer of unspecified spectrum licenses. I interpret this to mean that AT&T thinks it can get the deal done.”
Despite AT&T’s vehement denials that thousands of American jobs would be lost and its promise to bring 5,000 overseas call center positions back home, there’s simply no way that the company could achieve the touted synergies without eliminating a massive number of T-Mobile jobs. Back in June, my colleague David Selzer analyzed the composition of the $40b in long-term synergies that AT&T told investors it expected and concluded that a HUGE number—as many as 30,000—of jobs would be eliminated in the long run:
“The fact is that a merger like the one contemplated in this case will require a significant work force reduction to achieve AT&T’s publically predicted synergy value…Notice that the NPV of the non-headcount related synergies creates only about $19b in value, which is a hefty sum for sure, but is a far cry from $40b…Factoring in a workforce reduction of just under 85% of the T-Mobile employee base, based on my assumptions, provides about $900m in annual cash savings and another $7.8b in NPV. Combining these figures gets you annual savings in the $3b range and provides a total net present value of nearly $27b. This seems reasonable given that our calculations do not include the value of synergies generated in the first two years of operation after the deal closes, or any spectrum related synergies.”
Basically, Dave’s math concluded that it simply wouldn’t be possible to create that much in synergy value without firing the bulk of T-Mobile’s staff.
But the most obvious reason why I’ve been sure that this deal wouldn’t pass antitrust scrutiny is the fact that AT&T and Verizon Wireless already account for the vast majority of the wireless industry in the United States at this time, and are taking more and more subscribers from smaller competitors each quarter. In the third quarter of this year, AT&T added more net new subscribers than even Verizon Wireless; my analysis of the top wireless providers showed that AT&T and Verizon grabbed more than half of both gross and net adds in the period…and as we noted last summer, “Between 2006 and 2009 the combined share of net subscriber additions for AT&T and Verizon Wireless rose from 59% to 92%…and over the four years analyzed, the top-two carriers accounted for 71% of total net additions. Figures like these speak for themselves.”
The fat lady is about to sing. AT&T may decide to stubbornly fight in court or just walk away (after handing over substantial cash and spectrum to T-Mobile), but either way the deal is doomed. As a consolation prize, however, the FCC did indicate yesterday that it will support AT&T’s pending $1.9b buy of 700 MHz spectrum from Qualcomm.
As far as I’m concerned, Randall Stephenson and other AT&T execs need to seriously consider just walking away from T-Mobile as they consume tomorrow’s turkey. Take the $33b that’s left after paying T-Mobile’s breakup fee and deploy LTE as quickly as possible! How many markets does Verizon Wireless now serve with LTE (including this analyst’s home town)? Oh that’s right…179. And how many does AT&T serve now? 9. Time’s a wastin’.