On Wednesday, the Department of Justice rained on AT&T’s (T: Charts, News, Offers) parade, filing to block the company’s proposed $39 billion buyout of rival T-Mobile, which would make it the largest wireless provider in the United States. Together, the big four carriers – AT&T, T-Mobile, Verizon (VZ: Charts, News, Offers) and Sprint (S: Charts, News, Offers) – comprise over 90% of the market. The proposed buyout, in cash and stock, would make AT&T the largest wireless carrier in the United States, dethroning current market leader Verizon Wireless.
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Regulators are concerned that with only three competitors in the ring – with AT&T/T-Mobile hoarding the lion’s share at over 125 million – competition would be sharply reduced. Verizon, the largest American wireless provider, and Sprint, at a distant third, hold approximately 93 million and 50 million, respectively. Deputy Attorney General James Cole stated, “The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services.” The DOJ also points out that T-Mobile has been a key source of competition, with its innovation and quality enhancements, such as the first nationwide high-speed data network, and that merging with T-Mobile would give AT&T such a wide range that Verizon and Sprint would be placed at a severe disadvantage.
AT&T shares slid nearly 4% on Wednesday on the news, while Deutsche Telekom, the owner of T-Mobile, lost over 7%. Deutsche Telekom has been eager to divest from T-Mobile, which had been struggling against the other three carriers, and has stated that it is not willing to invest more into the company’s American business. Despite a highly visible ad campaign, T-Mobile lost 50,000 customers in the second quarter of 2011, bringing its total customers down to 33.6 million. T-Mobile has been unable to compete with its three larger competitors, due to the loss of its high-end market to Verizon and AT&T, and the erosion of its low-end market to Sprint and MetroPCS PCS. “We’re stuck in the middle from a brand point of view,” stated T-Mobile CEO Philipp Humm.
Things don’t look much brighter for AT&T. The telecom giant has to pay a $3 billion kill fee to T-Mobile if the deal falls through. In addition, the company must honor its agreement to share spectrum rights and other infrastructure, which could be worth billions more. AT&T has stated that it needs the deal to increase capacity for high-speed wireless services, which has experienced exponential growth in demand due to the increasing popularity of 3G and 4G enabled smartphones from Apple (AAPL: Charts, News, Offers) and Google (GOOG: Charts, News, Offers). Building new towers to compensate for the increased demand would be more expensive than simply buying out T-Mobile’s existing network. AT&T has claimed that the merger would benefit rural states which have no access to enhanced 4G networks. If the merger is approved, AT&T claims that it can upgrade its entire network to the 4G LTE standard within the next several years.
The government has recognized the increasing importance of mobile wireless telecom, with over 300 million data-enabled devices in use within the United States, and the necessity of fair price competition. The DOJ has not formally blocked the merger yet, but the filing is a red flag for investors. To date, every takeover the DOJ has challenged in court has failed to pass FCC approval. FCC Chairman Julius Genchowski stated, “Although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition.”
Despite the disappointing turn of events, AT&T is still considered one of the safest and slowest moving stocks in the Dow, and remains a safe haven for income investors, who consider its 5.8% yield to be a favorable alternative to bank CDs or bonds.
Other News About T
U.S. moves to block AT&T’s purchase of T-Mobile
Is this a replay of the 1980s for AT&T?
Antitrust Challenge Leaves AT&T Little Recourse
What does the future hold for AT&T if it can’t have T-Mobile?
Other Stocks in the News
Sprint May Get Short-Lived Boost From Bid to Block AT&T-T-Mobile Takeover
Sprint rises briefly, but can the boost last?
Verizon buys up cloud start-up
Verizon attempts to extend its arm into cloud computing.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
