AT&T, T-Mobile Retreat, What Does It Mean?

The legal team at AT&T (NYSE:T, news, filings) didn’t get much of a Thanksgiving break. Following the FCC’s bombshell earlier this week moving to oppose the merger, the AT&T and Deutsche Telecom AG (ETR:DTE, news, filings) have formally but temporarily withdrawn their applications to the FCC. AT&T now also says it will take a $4B charge in Q4 to account for the likelihood that the deal won’t happen and they’ll be on the hook for that hefty breakup fee. But both companies say they are committed to making the deal happen, but will focus on the DOJ antitrust approval first while reconsidering their overall approach.

That’s the party line anyway, but of course there are other ways to look at this – other implications worth considering:

• Renegotiating the breakup fee?  AT&T may be taking a charge this quarter, however if the deal is dead they still may have leverage to perhaps tweak the terms.  What if they choose to pursue the DOJ trial and appeals thereafter?  T-Mobile and DT lose time, and they’re losing market traction all the time yet are committed to backing this deal and not considering alternatives.  If DT is ready to call it quits behind closed doors, AT&T could negotiate a better exit for themselves by merely threatening not to give up so easily.
• Does DT have any viable options?  Well, we know this merger was by far the best payout available to them, but if you take it off the table they certainly had other possible routes they could have taken.  With the breakup fee in hand they would still need quite a bit more money to pour into the US business to revive it, and some are speculating they might move to sell their stake in Everything Everywhere over in the UK to do it.  But it doesn’t look like enough for a solo effort, which brings us to…
• All roads lead to … Clearwire?  Suppose they did get that breakup fee relatively soon and sold out of the UK for a nice bundle. Looks to me like all roads lead to Clearwire in various forms, because Clearwire has the infrastructure in place for a shared LTE buildout and capital needs that would fit within DT’s means.  Last Spring, the problem with the Clearwire approach for T-Mobile was WiMAX.  But with an LTE plan in place awaiting funding and Sprint looking to make the most of its own cash supplies, there is an obvious path to follow here.  A direct merger with Sprint would have all sorts of problems, but for the two of them to work together through Clearwire as a means of saving overall capital – there’s just got to be a sensible plan in there somewhere.
• Metro fiber is getting an early Christmas present – The consolidation of the wireless space to three major providers could never have been anything but bad for those supplying the fiber-to-the-tower out there. T-Mobile leases all its backhaul and more of it from competitive carriers than any of the other major wireless carriers. That would have changed if the AT&T deal went through, and I don’t see how they can be anything but happy that it appears mortally wounded.
• Divestments to the rescue?  I don’t think so.  Potential buyers of divested assets have little incentive to help AT&T here.  The problem regulators have with the deal is not that AT&T has too many assets in a few local markets, but because it changes the balance of power across all of them.  Any divestments large enough to shift that sentiment far enough to win would almost certainly make it not worth AT&T’s time, because that change in the balance of power is precisely what AT&T is after anyway.

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Categories: Mergers and Acquisitions · Wireless