AT&T’s T-Mobile deal almost dead
With increasingly hostile opposition, AT&T has decided to withdraw its application and focus on securing Department of Justice approval.
The company and Deutsche Telekom (DT), T-Mobile's parent, announced Monday that they have asked a federal judge to stay further hearings until Jan. 18th so that they could “evaluate all options.” This comes after the Justice Department announced its intentions to postpone or dismiss its lawsuit seeking to block the deal. With AT&T's withdrawal of its merger application with regulators, the Justice Department has no reason to pursue the case.
With this delay, it seems increasingly unlikely that the merger will go through in its current form before the Sept. 20 deadline next year. AT&T is looking for other ways to revive its attempts at securing the additional spectrum it says it needs to compete with Verizon (VZ) and Sprint (S).
Our $38 price estimate for AT&T stock is about 30% above the current market price.
Merger doubtful from the beginning
The merger was on shaky ground from the start. Ever since AT&T announced its intention to acquire T-Mobile, the company has faced opposition from many quarters. The first challenge came from the Department of Justice and then competitors Sprint and C Spire Wireless, who all filed anti-competitive lawsuits against the merger as they felt the deal would make the U.S. wireless market an effective duopoly, decrease innovation, drive up prices and cut jobs.
After assessing the increasingly hostile opposition that it has faced since announcing the deal, the company decided to withdraw its application from the Federal Communications Commission and focus on securing Justice Department approval first. (See AT&T withdraws FCC application as T-Mobile looks like a $4 Billion turkey.) Now that the Justice Department hearings are also likely to be postponed, AT&T is going to have difficulty closing the deal before the deadline. However, the fact that the company hasn't given up yet shows just how desperate it is for more spectrum. (See our note: Dish Networks' dish could be a key beneficiary of AT&T's hunt for spectrum.)
AT&T in desperate need of additional spectrum
The U.S. wireless market is mostly saturated, with the number of wireless subscriber connections (327.6 million) exceeding the total population of 315.5 million. So AT&T's focus is now on retaining customers and and taking market share from rivals. This is possible only if the company has enough spectrum to provide higher speeds with less congestion to the increasing number of smartphone users.
Additionally, Verizon's proposed $3.6 billion acquisition of SpectrumCo's wireless assets for its LTE network makes the play for additional spectrum even more crucial for AT&T. If the merger goes through, it will vault AT&T ahead of Verizon as the largest wireless carrier in the U.S. market. However, without the deal, its market share could decline or stagnate as it would struggle to provide speeds and coverage comparable to those of Verizon. We believe the company is now trying to salvage the deal in some likely reduced form as well as looking for spectrum elsewhere to meet its needs.
T-Mobile stands to receive $4 billion in cash and spectrum assets from AT&T if the merger doesn't happen. AT&T has prepared for this increasingly possible scenario by recording a provision in its Q4 2011 numbers for the potential penalty fees.
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The stock is expensive and the guidance is weak -- not an appetizing combination.
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