It’s a Dumb Deal Anyway
Just this morning I watched AT&T ceo Randall Stephenson tell CNBC how the combination of AT&T and T-Mobile was going to result in some 5,000 call center jobs being brought back to the United States from their present overseas locations…I laughed and wondered aloud at CNBC’s willingness to allow such blatant political posturing to be presented as “news”…
An hour or so later, I laughed even harder as I read the Breaking News Headline cross my muted television screen: DOJ Files Suit to Block AT&T/ T-Mobile Merger…Guess the folks in D.C. were unimpressed by Stephenson’s gushing. Good for them.
What really blows my mind, however, is that anyone was surprised by the news that the Department of Justice has found that the merger between the largest and the fourth largest wireless providers will be anti-competitive…Yet clearly they were.
Shares in AT&T were off more than 4% immediately, and have traded as low as $28/share, down from nearly $30 pre-announcement. Guess Wall Street wasn’t paying attention all these months as we at JSI Capital Advisors warned that in order to achieve the massive $40b in long-term synergies that the parties predicted, tens of thousands of American jobs would need to be eliminated…or when we pointed out that T-Mobile had started limiting its data plan usage just a short time after the merger announcement, despite the fact that it continued to bleed subscribers…or that AT&T and Verizon Wireless already accounted for the vast majority of subscriber growth over the past several years…or that literally thousands of Americans - an unprecedented number - had filed their opposition to the merger with the FCC.
Fact is, this deal never made sense to me, not even for AT&T. $39b is a huge price to pay for a company that is losing market share, is spectrum constrained and behind in real 4G deployment (despite T-Mobile’s unabashed use of the term in its marketing since last fall). At the web site set up by the two to promote the benefits of the deal, www.mobilizeeverything.com, the company lists the “Top Ten” reasons to support the deal. In the chart below, I’ve given my gut-reaction to each point (never mind the fact that several of the ten reasons are really the same thing):
In a television commercial currently airing to promote the combination, AT&T says something to the effect that “55m Americans will get broadband wireless service” as a result of the merger. What it doesn’t adequately explain is why they wouldn’t get it anyway! The map below shows AT&T’s spectrum depth across the U.S. at the time of the merger announcement. There are precious few markets where the company has less than 30 MHz of spectrum. Take that $39b and build it out!
Furthermore, in terms of already served markets, the overlap between AT&T and T-Mobile is huge. That means one less competitor in those markets, as well as fewer retail outlets and, oh yeah, fewer jobs.
Rival wireless provider Sprint, and its investors, cheered the news—shares in Sprint and step-child Clearwire rose between 8%-13% initially. But here too, I don’t really get it. Sprint has been very vocal in its opposition to the merger, but from my point of view, an AT&T/ T-Mobile combination would have served to eliminate Sprint’s biggest competitor in the market for budget-minded and prepaid customers. And with Sprint set to get the iPhone this fall, it should be reasonably well positioned to compete with the duopolists…
And make no mistake, the wireless industry has already become a full-fledged duopoly, in practice if not officially. As I noted above, AT&T and Verizon have been taking market share away from their smaller rivals for a couple of years now…with or without T-Mobile as a standalone operator, Sprint’s challenge to grow is daunting.
AT&T “Shocked and Appalled”
AT&T posted a response to the DOJ’s suit on mobilizeeverything.com a short time after the news:
DALLAS, August 31, 2011 – The following may be attributed to Wayne Watts, AT&T Senior Executive Vice President and General Counsel:
We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated.
We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive effects and we intend to vigorously contest this matter in court.
At the end of the day, we believe facts will guide any final decision and the facts are clear. This merger will:
• Help solve our nation’s spectrum exhaust situation and improve wireless service for millions.
• Allow AT&T to expand 4G LTE mobile broadband to another 55 million Americans, or 97% of the population;
• Result in billions of additional investment and tens of thousands of jobs, at a time when our nation needs them most.
We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court.
Based on comments made by Stephenson on CNBC this morning, including his speculation that the deal would close in the first quarter of 2012, I do believe that the company was blindsided by the news…but really, the writing was on the wall.
And that $7b in cash and spectrum that T-Mobile will get as a breakup fee when the deal doesn't happen might just give it the juice it needs to get back in the game. Maybe that was Rene Obermann’s plan all along?