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Monday
Dec262011

The Deal is Dead! Now What?

AT&T and T-Mobile Consider Life Post Deal

After enduring nine months of an increasingly hostile regulatory review, AT&T finally threw in the towel and announced it would abandon its efforts to acquire T-Mobile USA.  Back on March 20, 2011, AT&T announced that it planned to acquire T-Mobile in a transaction valued at $39b.  Although there was plenty of opposition to the deal from the very start, most analysts nonetheless expected the deal to pass muster with the Department of Justice and the Federal Communications Commission, provided, that is, AT&T agreed to sell off large swaths of overlapping spectrum and operations.

In fact, word was that AT&T was ready to sell Leap Wireless spectrum and nearly 25% of T-Mobile’s U.S. subscriber base in an effort to gain regulatory approvals.

But the deal started to spiral south in late August when the DOJ filed suit to block the merger.  When, in late November, the FCC concluded that the deal would cause price increases and harm customers, all that was left was for the Fat Lady to sing.  Stick a fork in it, the deal was dead!

Now we begin the healing process and both AT&T and Deutsche Telekom, T-Mobile’s German parent, have gaping wounds to lick.  AT&T is saddled with what has been estimated to be a $6b deal break-up fee.  In addition to the two carriers entering a seven-year roaming agreement, the package requires AT&T to pay T-Mobile $3b in cash as well as spectrum in markets including Los Angeles, Dallas and Boston.

AT&T ceo Randall Stephenson is probably feeling a little vulnerable now that the deal has been killed.  It’s tough enough that Stephenson had to follow in the shadow of former AT&T ceo Ed Whitacre, who transformed the smallest of the Baby Bells, Southwestern Bell, into AT&T through a string of successful blockbuster deals – the culmination of which was the acquisition of AT&T.  Now Stephenson is faced with having to cut a $3b check to T-Mobile and is left with a core operation whose 4G wireless strategy has suffered a major setback while its principal competitor, Verizon Wireless, appears to be lapping the pack. 

Despite the setback, AT&T vows to continue to invest in its networks and encourages the government to free up additional spectrum.  With respect to investing in its network, AT&T will need to work quickly to meet the build-out requirements associated with the $6.6b worth of mostly B-block 700 MHz licenses it acquired during Auction 73 back in early 2008.  B-block licenses must provide service covering 35% of its geographical area by February 2013.   

Regarding spectrum, and perhaps as in a gesture of goodwill following a brutal past nine months, the FCC approved AT&T’s previously announced $1.9b acquisition of D- and E-block 700 MHz licenses from Qualcomm just two days after AT&T officially quit the T-Mobile deal.  The Qualcomm deal gives AT&T as much as 16 MHz of new 700 MHz spectrum and should help the carrier assemble the 20 MHz of contiguous spectrum necessary to provide robust 4G services in many markets.  But it is highly likely that AT&T will once again be shaking the trees for available spectrum, particularly 700 MHz spectrum.

As bad as things seem for AT&T, they’re probably even worse for T-Mobile.  Yes, T-Mobile ceo Philipp Humm will get $3b of cash and some pretty nice wireless licenses to soothe the pain but at the end of the day the spectrum-poor T-Mobile has some serious strategic issues.  There is plenty of speculation that T-Mobile will rekindle talks with Dan Hesse and Sprint.  Reportedly, Sprint and T-Mobile were close to a deal earlier in the year before AT&T threw a wad of cash at Deutsche Telekom.  In fact, just a few days before AT&T announced that it had come to a $39b agreement to acquire T-Mobile, the Wall Street Journal was reporting that Sprint and T-Mobile were closing in on a deal.  Other options for T-Mobile include acquiring Leap Wireless or doing a data deal with Clearwire.  There is even talk that T-Mobile might team up with DISH Networks, which finds itself with a bunch of spectrum in search of a wireless strategy after its acquisitions of DBSD North American and Terrestar Satellite Network. Interestingly, there is also an increasing buzz that AT&T may itself be making a run at DISH.

But it wasn’t just AT&T, T-Mobile and Deutsche Telekom who lost out on the deal.  According to reports, there were seven banks lined up to receive $150m of fees if the deal closed.  No deal means scaled back Holiday plans for a number of “poor” Wall Streeters!