Sunday, March 27, 2011
AT&T’s Acquisition of T-Mobile Reshapes the U.S. Mobile Telecommunications Market
Last Sunday, AT&T announced a $39 billion deal to buy Deutsche Telekom’s T-Mobile USA. AT&T’s offer values its rival at 7 times the company’s 2010 earnings before interest, taxes, depreciation, and amortization (known in the industry as EBITDA), and the amount is a staggering 5.2 times greater than AT&T’s 2010 EBITDA. According to the deal’s terms, AT&T will pay $25 billion in cash and the rest in stock. As a result, Deutsche Telekom will acquire 8 percent of AT&T’s shares and receive one seat on the company’s Board of Directors. Although the acquisition has been approved by the Boards of both companies, it may be as long as 12 months before the deal closes.
Upon successful completion of the transaction, AT&T plans to retire the T-Mobile name in the U.S., and will allow Deutsche Telekom to continue using it in its European operations. Most importantly, AT&T’s customer base will exceed 130 million subscribers or approximately 40 percent of the mobile market in the U.S. If the deal does not close, AT&T must pay a $3 billion breakup fee to Deutsche Telekom, provide T-Mobile USA with additional radio spectrum, and reach a 3G roaming arrangement with the Deutsche Telekom affiliate.
The deal announcement came as a surprise to many because Sprint Nextel Corp. and T-Mobile USA, the U.S.’s third and fourth largest mobile telecommunications providers, respectively, had been actively engaged in merger talks. Nevertheless, experts opine that AT&T’s purchase of T-Mobile USA is a more logical move because the two companies use the same wireless technology. Thus, AT&T will be able to alleviate its network congestion and spectrum shortage. The company will also reduce its costs by approximately $40 billion. Additionally, the resulting scale and technology advantages will help AT&T secure the highest profit margins in the industry. Yet another upside for AT&T is that the acquisition will allow the company to develop its next generation network, which would likely cover about 95 percent of the U.S. population.
The acquisition is also welcome by Deutsche Telekom. In 2001, the German telecommunications company paid $35 billion to acquire VoiceStream Wireless, the predecessor to T-Mobile USA. Over the next 10 years, Deutsche Telekom spent billions of dollars to expand T-Mobile’s network and spectrum. Despite this huge capital outlay, however, its U.S. affiliate was consistently lagging behind industry leaders. The German company reported that it would use the cash proceeds from the sale of T-Mobile USA to retire debt and to buy back some of its stock. Despite selling T-Mobile USA, however, Deutsche Telekom retains presence in the U.S. market through its ownership of 8 percent of the new AT&T.
Not everyone stands to benefit from the acquisition, however. Cell phone manufacturers are among the perceived losers because they will have one less company to which to market their devices. Sprint Nextel Corp. is another perceived loser. Not only did Sprint’s shares plummet immediately following the acquisition announcement, but the company now has the smallest market share among the national wireless carriers. Since Sprint can no longer rely on a merger with T-Mobile USA as a means of growing its customer base, it is left with only two options. The company can either offer itself for sale or start acquiring smaller wireless companies, such as U.S. Cellular and MetroPCS.
Some experts believe that a major obstacle to closing the AT&T-Deutsche Telekom deal is securing its approval by the Federal Communications Commission (“FCC”) and the Department of Justice. Approval may only be given if the acquisition is in the best interest of consumers and the economy overall. Also, regulators must conclude that the transaction will not adversely affect industry competition.
Experts claim that regulatory approval may be hard to obtain considering the FCC’s 2010 industry report, which concluded, for the first time, that there was no competition in the wireless telecommunications industry. AT&T’s confidence in the deal’s forthcoming approval, however, stems from the fact that if analyzed on a market-by-market level, the industry is fiercely competitive. For example, AT&T points out that there are at least five companies competing in eighteen of the twenty major markets in the nation. AT&T is also likely to put a political spin on this acquisition by asserting that it will allow the company to improve its wireless service, use more efficiently its scarce spectrum, and expand broadband access. Despite AT&T’s favorable odds for securing regulatory approval, Jonathan Chaplin, a Credit Suisse analyst, maintains that he has never before seen a “deal with more regulatory risk” in the U.S.