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AT&T pulls out of T-Mobile merger

AT&T and T-Mobile have dropped their proposed $39bn merger

US carrier AT&T has ended its bid to acquire rival T-Mobile USA, after a nine-month pursuit. The firm announced that it has agreed with T-Mobile’s parent company Deutsche Telekom AG to terminate the bid, which involves AT&T paying DT $4bn in break-up fees.

AT&T condemned the efforts of the Federal Communications Commission (FCC) and the Department of Justice (DoJ) for the parts they played in blocking the proposed $39bn merger.

The DoJ filed a civil antitrust lawsuit in a bid to block the deal, claiming that the deal would “substantially lessen competition” in the US wireless sector, while the FCC said that AT&T would have to face an extra administrative hearing next year, before the merger could go ahead. FCC chairman Julius Genachowski had said that letting the two operators merge would “not be in the public interest” and that if approved, “thousands of jobs will be lost in the aftermath”.

Competitor Sprint Nextel also attempted to block the acquisition by bringing a lawsuit against AT&T, claiming the deal would be a violation of Section 7 of the US Clayton Act, which covers competition issues in the US.

These moves resulted in AT&T and T-Mobile USA withdrawing their filings relating to the merger from the FCC last month. At the time, the firms said they would continue to pursue the merger “as soon as is practical”, despite opposition from the DoJ, but they have now backed out entirely.

“The actions by the FCC and DoJ to block this transaction do not change the realities of the US wireless industry – it is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately,” AT&T said in a statement.

It continued that the abandoned merger would have offered an interim solution to the US spectrum shortage, and claimed that now customers will be harmed and needed investment will be stifled.

Randall Stephenson, AT&T chairman and CEO, said:  “Over the past four years we have invested more in our networks than any other US company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well under way with our nationwide 4G LTE deployment. To meet the needs of our customers, we will continue to invest.”

He added, however, that adding capacity to meet these needs will require policymakers to do two things.

“First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the US wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC.  Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.”

As a result of the merger breaking down, AT&T will pay out a pretax accounting charge of $4 billion in the 4th quarter of 2011 to Deutsche Telekom. In addition, the two operators will enter a mutually beneficial roaming agreement.

Thomas Wehmeier, principal analyst for telco strategy at Informa Telecoms & Media said that, despite receiving a huge break-up fee, Deutsche Telekom will be disappointed with the outcome of the proposed merger.

“There are very few occasions when you are forced to walk away from the table with $4bn in your pocket and still feel like you’ve just been short-changed – that’s what the collapse of the sale of T-Mobile USA will feel like to Deutsche Telekom,” he said.

“Having frequently – and very publicly – reiterated the absence of a Plan B, the break-up fee will be small consolation as it is forced to carve out a third path, or Plan C.”

Wehmeier said that, in the short term, Deutsche Telekom’s management will have to focus on how to shore up its faltering US business, but a longer-term strategy needs to be carved out quickly. The US arm of T-Mobile contributes a sizeable percentage of group revenue and EBITDA, but has been in limbo for nearly a year now, and Wehmeier believes investors will be seeking swift clarification of its revised strategy and evidence that it can meet its 2012 targets.

He added that the news also has wider implications for the sector – and sets the tone for future consolidation in the industry.

“Much has been made of the need for in-market consolidation within the intensely competitive mobile industry, but having to potentially navigate around seemingly insurmountable regulatory hurdles is likely to shake the confidence of would-be consolidators to the core.”


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