AT&T/T-Mobile: Riddled With Regulatory Risk

In the wake of AT&T Inc. (NYSE: T) and T-Mobile US Inc. 's US$39 billion surprise deal that has rocked the US wireless industry, the biggest concern among analysts is how this merger might clear the regulatory hurdles it faces at the U.S. Department of Justice and the Federal Communications Commission (FCC) . (See AT&T to Buy T-Mobile USA for $39B.)

While the sale to AT&T is generally regarded as a good fit and a positive move for Deutsche Telekom AG (NYSE: DT) -- as shown by the surge in the German operator's share price today -- the transaction is not expected to be completed until the first half of next year, which signifies a long legal and regulatory process. (See DT's Shares Rocket on AT&T Deal, What Happens to Sprint After AT&T/T-Mobile Merger? and Could AT&T/T-Mobile Deal Mean an HSPA+ iPhone?)

AT&T's proposed acquisition of T-Mobile would bring together the number two and number four players in the market, a combination that would make AT&T the largest operator in the U.S. with a (current) market share of 43 percent. That potential dominance has left industry and financial analysts wondering what kind of concessions the operators will have to make to get the deal approved.

Here's what analysts are saying so far about the U.S. wireless industry's mega-deal:

  • Credit Suisse Analyst Jonathan Chaplin told the Financial Times that he had "never seen a deal with more regulatory risk be attempted in the U.S.," and while it was unlikely AT&T would attempt such a deal if it thought it couldn't be completed, it will likely require "massive divestitures and concessions" to achieve regulatory approval.

  • Heavy Reading Senior Analyst Gabriel Brown says: "It’s not unheard of in international markets for the lead operator to have 40 percent, or greater, market share by subscribers, but U.S. regulators will inevitably extract concessions if the deal is to be approved. The questions are how deep, and in what regions, it will look to cut the combined operator down to size."

  • Informa Telecoms & Media 's Principal Analyst Thomas Wehmeier believes the deal will actually have the most value for lawyers and bankers during the year-long regulatory approval process. "The concentration of close to 75% of the wireless market into the hands of just two players, AT&T and Verizon, will inevitably draw fire from the US authorities, including the FCC and the Department of Justice," he wrote in an email distributed Monday morning. "If and when the deal is finally approved it will likely not be without significant concessions being imposed upon AT&T by the industry watchdog, such as divesting spectrum holdings, divesting customers or granting access rights to tower sites to smaller players where excessive market concentration is identified."

  • But there are some elements of the deal that could work in AT&T and T-Mobile's favor for regulatory approval, according to this Bloomberg report. Larry Freedman, a partner at law firm Edwards Angell Palmer & Dodge LLP, told Bloomberg in an interview: "One of the interesting things that's going to help them at the FCC is the compatibility of the network. The spectrum crunch would be alleviated because you have complementary networks and the ability to use each other's spectrum. That could be viewed as a positive."

  • Matt Hatton, director of Machina Research, wrote in his blog that this deal could spark more M&A action in the U.S. "A T-Mobile/AT&T tie up creates a GSM powerhouse with 130 million customers. It is likely that the CDMA operators will consider doing the same to give themselves 150m subs and a nearly 50% market share, thus effectively creating a duopoly for services…"

  • Mizuho Securities USA Inc. 's Executive Director of equity research for telecom services Michael Nelson has picked the likely winners and losers from the deal: "We believe Verizon is well-positioned to extend its share of postpaid subscribers. MetroPCS may be the biggest winner with extended share gains, particularly from [T-Mobile USA], and a potential increase in asset value due to the scarcity factor. Infrastructure companies and tower operators may be the biggest potential losers with one less national carrier as a customer."

  • Forrester Research Principal Analyst Charles S. Golvin believes the deal is all about scale for AT&T. "The acquisition, were it to pass regulatory muster (no slam dunk that), addresses a number of scale challenges for AT&T," writes Golvin in his blog. "Most importantly, it delivers the precious spectrum assets needed to deploy a robust, nationwide LTE network… It also delivers a boatload of extant base stations, many fed by Ethernet or fiber backhaul, which will help AT&T bolster its service quality (iPhone owners please don’t hold your breath). And it delivers a skilled radio frequency team that will help the company plan and deploy its next generation network."

    — Michelle Donegan, European Editor, Light Reading Mobile

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    Vinu Alappat 12/5/2012 | 5:09:53 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    If this deal goes through UMTS network will become AT&T's monopoly, which is bit scary. All the UMTS subscribers will be at the mercy of one operator that is AT&T. I understand that this will help AT&T to deploy nation wide robust LTE network by leveraging on T-Mobile spectrum. AT&T is using 850 MHz and 1900 MHz for their UMTS network while T-Mobile is using 1700 MHz and 2100 MHz for their UMTS networks. If both the networks are merged with AT&T acquiring T-Mobile, then the new UMTS phones will have to be manufactured with 850, 1700, 1900 and 2100 bands.


    MMQoS 12/5/2012 | 5:09:50 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    Thank you Michelle for posting this message because I now have to speak out on the direction of my own personal and previous Telco "Service Provider" here in Silicon Valley.  SBC, nee att, has gone from being a leading provider of voice, video and data to becoming an acquisition entity ala Berkshire Hathaway or worse with "Service" being a secondary or less priority. While I disliked the direction that Ed Whittaker took with SBC when it acquired Pacific Bell which was a very innovativate Service Provider here in California providing multimedia optical services for groups like Crosby, Stills, Nash and Young, at least Ed came up with experience thru working in the network.  Randall Stevens as the CFO under Ed has elected to ignore his Lab guys recommendations and instead to take SBC/att into becoming an acquisition entity much like a financial or PE organization.  

    Randall as CFO made the decision to not join the Tri-BOC with FTTH and to take the risk to put uVerse onto a "Bell" wire legacy network based on a faulty assumption that it would be less costly.  How much did all of those truck-rolls and "D" servers cost per sub and what has been the uVerse churn rate?  Later with Ed he elected to acquire Bell So. and to retire most of the BS deep fiber infrastructure and push the ill designed uVerse "Bell" wire solution into the BS network.   What's the take rate for uVerse including "churn" in the old Bell So. region?

    Now instead of taking a classic Service Provider solution to provide better residendential landline and HDTV services via infrastructure investment, he is once again going out to acquire T-Mobile.  What is behind this, a better voice, video and data service?  

    My cable provider here in Silicon Valley is Comcast and Jeff now with DOCSIS 3.0 in the neighborhood and my being involved in HDTV video architecture, why should I stay with SBC/att?  I no longer subscribe to uVerse video due to poor video quality (I was less than 100 meters from the VRAD) even though my billing envelop lists me as a "uVerse" customer.

    So yes while I hate government intervention and don't like MSO's, I think it is play here.  We lost the wonder of Pac Bell with their industry leading video experiments and now I see no plans for video infrastruture investment for att.  

    Verizon we need you in the Valley.


    comtech3 12/5/2012 | 5:09:50 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    Corrections. The planned acquisition of T-Mobil by AT&T

    comtech3 12/5/2012 | 5:09:50 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    Folks, we're heading back to the days prior to the Telecommunication Act of 1996.Look what is happening here, Verizon, the largest wireless/ wired carrier being supplanted in the wireless arena with it's planned acquistion of T-Mobile is going to spell doom for the consumers.I smell an hidden collusion between these two who were once one and the same in some respect prior to the break up by Federal regulators.

    comtech3 12/5/2012 | 5:09:49 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    This merger makes no sense at all. T-mobll does not seem to be hurting cash flow-wise,and AT&T could do a better job by using some of that $39B that does not include stock option to improve their service to its customers.

    paolo.franzoi 12/5/2012 | 5:09:48 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    Of course it makes sense.  The way to drive profit out of commodity businesses is not to invest more but to get scale.  

    If you haven't noticed, this whole Service Provider thing (read Service as the word Bandwidth) is a commodity.



    WilliamofOccam 12/5/2012 | 5:09:47 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    As the administration grapples with the AT&T and T-Mobile merger, this is a good time to consider what concessions the regulators can wrangle out of carriers. My two suggestions are: First, break the phone monopoly enjoyed by carriers. In my opinion, the practice of operators subsidizing phones has hampered innovation in the market place with a few vendors manufacturing most phones. Second (and this is related to my first point) consumers must be allowed to switch operators more easily than now, the standard two year contract prevelant today ridiculously disadvantages mobile phone users.

    paolo.franzoi 12/5/2012 | 5:09:47 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    How are you going to impose AT&T/Tmobile conditions on Verizon and Sprint?



    Gabriel Brown 12/5/2012 | 5:09:46 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    @William, in the UK you can buy your own phone and take a 30 day contract (what I do), but the majority of mid- and high-end phones are sold via 18- and 24-month contracts. That seems to be what most people want and probably works out less expensive for the customer.

    Buy-your-own might get more interesting as the cheap Android devices proliferate, but for now, it's a niche activity. 

    WilliamofOccam 12/5/2012 | 5:09:44 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    Gabriel: I believe that, in the long run, empowering consumer choice is the right thing to do. At present (at least in the US and likely in UK as well) consumers have to choose both a phone model and a plan instead of choosing them independently. This implies that consumers cannot efficiently reward and punish with their wallet, a requirement for innovation and growth (think AT&T and iPhone, at least until recently). In the long run, I do believe that breaking up such alliances will benefit consumers.


    Seven: Yes, the merger does not involve Verizon and Sprint (at least until now, for all one knows these two may decide to merge as well). However my point is that now is good time for the US to regulate the market and perhaps the current environment gives the FCC more teeth to enact a change.

    Not that I believe any of what I propose will happen in the short term, but I am just imagining the possibilities!


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