Entries in Deal_T-Mobile:ATT (10)

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!

Wednesday
Nov232011

FCC Calls for Hearing on AT&T / T-Mobile Combo

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’. 

Wednesday
Aug312011

Surprise, Surprise...DOJ Says "No Way" to AT&T - T-Mobile Merger

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?

Tuesday
Jun072011

AT&T Plus T-Mobile Could Equal 30,000 Fewer American Jobs

No Matter How You Crunch the Numbers, It's a LOT of Jobs

The harsh reality behind any merger is that people lose their jobs, and if AT&T (NYSE:T) and T-Mobile USA combine, it’s likely that more than 30,000 of T-Mobile’s work force will ultimately be let go.  Most of these workers will be those working as sales agents or customer service representatives;   people who are earning between $20,000 and $30,000 a year plus health care and retirement benefits.   AT&T, of course, is not commenting about the issue of job cuts and is instead pushing the message that the combined workforce will have “good jobs,” which is true for those who will still have them.

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.  The synergy value, which is the total benefit that shareholders should realize after payment of the purchase price, is estimated at a whopping $40b.  In order to achieve this synergy target, AT&T has said that within three years of closing the deal it will generate an annual cash savings of $3b.  The chart below outlines our estimates of the annual cash savings and net present value (NPV) of the significant, NON-employee areas that AT&T has identified as synergy opportunities.   

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.

The chart below shows our expectations about the number and type of T-Mobile employees that will be let go. (The estimates presented were developed internally at JSICA through the use of publically available information, and are not based on comments from either T-Mobile or AT&T). 

With that disclaimer, however, we believe that the numbers shown are directionally correct and demonstrate the magnitude of what will occur when the merger closes.  There is a caveat to add; if AT&T is required to divest itself of some of the T-Mobile’s operations, the sale would probably include the workers in those market areas.  This may lessen the overall number of job losses but the impact of the transaction would still be widely felt within the ranks of the remaining employees.

Of course we have no precise crystal ball, but I believe it is safe to say that the outcome of this merger will result in a major loss of American jobs.  AT&T’s tactics of happy talk, which is devoid of any real information about its post-merger plans, should leave those communities that rely heavily on T-Mobile as a local employer on guard.  

Wednesday
Jun012011

T-Mobile's New Data Prices: The Cynical View

Is There a Method to the Madness?

On May 23rd, T-Mobile announced that it was changing the terms of its unlimited data services. Specifically T-Mobile now limits the amount of monthly high-speed bandwidth available to 2, 5 or 10 Gbytes. This move represents a price increase for its data services. Raising prices seems like a strange thing to do given that government regulators will be assessing the potential impact that the proposed sale of T-Mobile by Deutsche Telekom AG ("DT") will have on the price of wireless services as well as the message that both T-Mobile and AT&T (NYSE:T) have been delivering that the transaction will have almost no price related impacts.

So why would T-Mobile take such action now?

Many of the reasons for such action seem straight forward but there is one possible explanation that if true, would be truly cynical. What if T-Mobile wanted to intentionally increase its monthly churn rate and accelerate it subscriber losses? At first blush this would seem to work against management’s goal of maximizing firm value, but if DT views the sale of T-Mobile as necessary to its core Group strategy, then accelerating subscriber losses might actually help push the transaction’s approval. When viewed through this lens it makes some sense to increase prices for service today. Until the merger question is resolved, increased churn and continued subscriber losses are likely to be the ongoing trend at T-Mobile, so why not use these trends to maximum advantage.

On May 26th, Rene Obermann, the ceo of DT, of testified in front of the House Subcommittee on Intellectual Property, Competition and the Internet. During Mr. Obermann’s opening statement he specifically talked about T-Mobile’s negative subscriber trends, pointing out that T-Mobile had lost 471,000 contract subscribers during the first quarter of 2011.  He went on to say that most of these subscribers had become customers of carriers such as Sprint, Metro PCS or Leap Wireless who offer rate plans that are similar to those currently offered by T-Mobile. If the shift in subscribers from T-Mobile to these other carriers were material, then it is certain that both T-Mobile and AT&T would point to this as evidence that competition within the industry remains strong and that the DoJ and FCC need not worry about negative  impacts to the industry resulting from the proposed transaction.

The reality is that there seems to be no compelling business reason for T-Mobile to raise prices at this point in time.  For example, there is no evidence suggesting that T-Mobile would need to raise prices to protect the network. When asked directly about the current state of T-Mobile’s network, Mr Obermann responded that there were no immediate issues associated with the network and it was only in the long-run, when T-Mobile wanted to shift to LTE, that the company would be facing any spectrum capacity issues.

Would T-Mobile intentionally increase churn in an effort to manipulate the regulatory approval process? Who knows, I for one am not willing to say that this is the reason behind T-Mobile’s actions, but it does seem suspicious that T-Mobile would choose to increase its pricing right now.