Quick Thoughts: The DoJ vs. AT&T – What Does it Mean for the Merger?
The DoJ’s announcement that it will sue to block AT&T’s acquisition of T-Mobile USA should come as no surprise for several reasons:
-Justice, under the Obama administration, has been active with a strong anti-trust agenda, having blocked NASDAQ’s proposed take out of NYSE-EuroNEXT, and Verifone’s proposed acquisition of Hypercom.
-The deal, as proposed, would reduce the number of competitors in 97 of the largest 100 markets and increase AT&T’s subscriber market share to more than 45%. This level of concentration would obviously raise red flags for anti-trust lawyers.
-T-Mobile has been the price leader in the market and has been an early adopter for many technology innovations, such as HSDPA+. This was cited in the DoJ’s commentary today.
-The combined company would also control nearly half of the commercial spectrum in most major markets. While this is a bigger concern for the FCC than the DoJ, it remains a major hurdle for deal approval.
The $3B breakup fee due DT virtually assures that AT&T will propose remedies to the DoJ’s objections rather than withdraw. This is not unusual and it is certain that AT&T has anticipated this as a potential scenario. Toward this end, there are several wrinkles to consider:
-The typical remedy – divesting assets in specific business and geographic areas – is likely unworkable in this case. The anti-competitive impact occurs in the central business of both companies and extends to nearly all of the geographies in which they serve.
-Divesting subscribers to competitors, which has been done in other communications mergers, is problematic in this case, as AT&T and T-Mobile are the only two large wireless carriers using the GSM technology standard. Customers acquired by rivals would have to agree to change their devices to be compatible with a new network.
-Spectrum divestitures are also problematic, as bandwidth is the primary impetus behind the deal, and would not address the DoJ’s main concerns over market concentration.
-The FCC must also approve this merger, and will not do so if it is under suit from the DoJ.
However, all is not lost for this deal. We believe that there may be alternative ways to satisfy government objections.
-AT&T could agree to free customers from contractual obligations and compensate them for the costs of transitioning to an alternative carrier. This would be a boon to price rivals like Sprint, MetroPCS, Leap and US Cellular.
-AT&T could agree to regulatory oversight on pricing. Not likely, but possible.
-AT&T could agree to regulated cost-plus wholesale access to its network by other carriers, facilitating roaming by regional networks and enabling resellers. This is more likely and would be good for these smaller players.
-AT&T could restructure the deal as a network sharing arrangement, spinning off the T-Mobile brand as an independent network reseller. This may not satisfy the FCC’s concerns over spectrum, but would result in the least upheaval for consumers. It would depend on capitalizing T-Mobile sufficiently to give it a chance of survival.
-Congress could lessen spectrum objections and promote competition by authorizing the FCC to conduct incentive auctions of 120MHz in the coveted broadcast TV band. Note that support for the merger lies with the same members of Congress that have been sitting on the FCC’s proposal.
We believe that room exists to gain eventual approval of the merger, but that it will likely press the September 2012 deadline for payment of the fee to DT before the deal is done. Because we believe any agreement will yield new spectrum and greatly reduced barriers to churn on the customers of the combined entity, we see the process as favoring smaller carriers.