AT&T/T-Mobile Merger: Pushing the Edge of the Envelope

Obviously, Sprint must have been valuing T-Mobile for much less than the reported $39 billion price that AT&T has agreed to pay.  Given the high antitrust hurdles to approval of an AT&T/T-Mobile combination (this would give two carriers, AT&T and Verizon, a combined market share of almost 80 percent), we have to think that if Sprint had offered anything in the low $30s, Deutsche Telekom would have opted for a Sprint deal.  A combination of Sprint and T-Mobile would have had smooth sailing at the FCC and DOJ.

Notwithstanding, this is probably a good deal for T-Mobile.  First, if it goes through, this is a great price.  Second, if it doesn’t go through, T-Mobile gets a $3 billion break-up fee, which is equivalent to a whole year’s capital budget!

There is another important point to make.  Although I just threw out the 80 percent market share figure, as have many others, neither the FCC nor the DOJ looks at the USA as a single “market” for wireless services.  Traditionally, the regulators have looked at each metro area as a separate “market,” likening wireless service to local phone service.  Although there may be some individual metro areas where AT&T and T-Mobile combined have such a large market share that the regulators will balk, the likelihood is that this deal gets granted with “conditions,” as opposed to an outright denial from regulators.  To the extent that AT&T’s CEO says the FCC has to look at this merger on a market-by-market basis, he is just accurately summarizing what the FCC has done in the past.

At least in the short term, this deal is not good for Sprint or for other carriers whose main asset is ample spectrum, because T-Mobile gives AT&T additional spectrum, especially where AT&T needs it most, in the major metro areas.  That means AT&T has less need to go out and quickly acquire more spectrum somewhere else.

I say “in the short term,” because the flip side is this.  If and when this transaction is approved, it will then be very difficult for the regulators to say that Verizon can’t acquire Sprint, or for that matter, Clearwire.  So maybe, in a perfect world, this deal will turn out to be a big win for all these companies’ shareholders.  The impact is still unclear for consumers, who are bracing for higher prices; broadcasters, who are hoping that this transaction sheds new light on demand for spectrum; and wireless ISPs, who are concerned about preserving competition for spectrum and customers.  Keep your seat belts on, because this deal may take a year to 18 months to get done, if at all.