AT&T’s $39 Billion Merger With T-Mobile Target of U.S. Antitrust Complaint
By Tom Schoenberg, Sara Forden and Jeff Bliss - Aug 31, 2011 1:43 PM PT
The U.S. Justice Department sued to block AT&T Inc.’s proposed $39 billion takeover of T-Mobile USA Inc., saying the deal would “substantially lessen competition” in the wireless market.
The government is seeking a declaration that AT&T’s takeover of T-Mobile, a unit of Deutsche Telekom AG (DTE), would violate U.S. antitrust law, according to a complaint filed today in federal court in Washington. The U.S. also asked for a court order blocking implementation of the deal, the largest announced acquisition of the year, according to data compiled by Bloomberg.
“I don’t see any room to settle the case,” said Bert Foer, head of the American Antitrust Institute in Washington, in an interview. “They have clearly drawn a line in the sand.”
AT&T Chief Executive Officer Randall Stephenson’s proposed purchase of Bellevue, Washington-based T-Mobile, announced in March, would combine the second- and fourth-largest carriers to create a new market leader ahead of No. 1 Verizon Wireless. The new company would dwarf current No. 3 carrier Sprint Nextel Corp. (S), which argued against the deal.
“AT&T’s elimination of T-Mobile as an independent, low- priced rival would remove a significant competitive force from the market,” the government said in court papers. Dallas-based AT&T fell as much as 5.5 percent in New York trading after Bloomberg News broke the news of the lawsuit.
Government Suit
AT&T said it was surprised by the government suit and that it will ask for an expedited hearing in the matter.
“We have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” Wayne Watts, AT&T’s general counsel, said in a statement. He said the company intends to fight the litigation.
Bonn-based Deutsche Telekom said in an e-mailed statement that it too would contest the U.S. government suit.
“DOJ failed to acknowledge the robust competition in the U.S. wireless telecommunications industry and the tremendous efficiencies associated with the proposed transaction,” the German company said, adding it appreciates the Justice Department’s “willingness to discuss possible remedies” to address the competitive concerns.
Big Merger Challenged
“The important point is that the Justice Department has gone ahead and challenged a big merger of competitors, which it just hasn’t done,” said Eleanor Fox, a law professor at New York University. “People were getting used to seeing press releases saying the Justice Department has agreed to merger XYZ with a spinoff.”
The suit may be part of a negotiating strategy, said David Balto, a Washington-based antitrust attorney. The U.S. may have decided “the best way to have strength in the settlement talks is to file a lawsuit,” he said in an interview.
Other experts disagreed, saying the Justice Department wouldn’t have sued if it was still seeking a settlement that would allow the merger to go through.
“This isn’t just a negotiating strategy, this isn’t just a placeholder, they do mean to block it,”Rebecca Arbogast, a Washington-based analyst with Stifel Nicolaus & Co., said in an interview, citing the detailed federal complaint. “There still is some room for negotiating a settlement, but the likelihood seems narrow.”
Entire Analysis
Foer, of the American Antitrust Institute, which supports antitrust enforcement and opposes the merger, said the Justice Department would have to drop their entire analysis on the national telecommunications market and settle it by local markets if it was seeking a negotiated solution.
“If it could be settled, they would still be talking about it,” he said.
Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum and to reduce charges for calls into AT&T’s network, a package valued at as much as $7 billion, Deutsche Telekom has said.
Cancellation Fee
“Given the size of the cancellation fee that was negotiated into this agreement, AT&T has the incentive to fight,” said Andrew Gavil, a law professor at Howard University in Washington. “The fact that the Justice Department is challenging the deal doesn’t mean they won’t negotiate a resolution at some point.”
AT&T had been working to bolster its case as analysts became less certain that the acquisition would be approved. A Stifel Nicolaus survey of 32 polled observers published Aug. 11 found sentiment the deal would win clearance had slipped since early July, with fewer than half saying it would be approved.
AT&T pledged to bring 5,000 call-center jobs back to the U.S. from other countries once the merger closes and that it wouldn’t cut any U.S. wireless call-center jobs as part of the deal. The jobs plan doesn’t change AT&T’s forecast for savings from the union, it said.
Stocks Fall
AT&T fell $1.14, or 3.9 percent, to $28.48 in New York Stock Exchange composite trading after declining as much as $1.62 today. Deutsche Telekom’s American depositary receipts dropped 7.3 percent to $12.78. Each ADR represents one ordinary share. Overland Park, Kansas-based Sprint’s shares jumped as much as 9.9 percent on the news before closing at $3.76, a 5.9 percent gain.
Some U.S. lawmakers have said the deal may reduce competition and raise consumer costs. The Federal Communications Commission this month asked AT&T for more information about how the deal would expand high-speed wireless service in the U.S. Cable and satellite carriers including Dish Network Corp. and Cablevision Systems Corp. have also protested the deal.
The FCC said that it was continuing its review. In an e- mailed statement FCC Chairman Julius Genachowski said the record before the agency “raises serious concerns about the impact of the proposed transaction on competition.”
New Models
AT&T submitted new economic models to the FCC in July that it said showed the merger would reduce prices and increase service in large metropolitan markets. The models offer “further detailed support” for arguments that the merger will lessen strains on the company’s wireless network, lower costs and increase quality, AT&T said in the filing.
The combination would reduce wireless communication competition in the U.S., driving prices higher, making service worse and offering fewer products for U.S. consumers, the Justice Department said today in a statement.
“AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers,” the government said in the statement. “AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.”
The Acquisition
With the acquisition, AT&T would displace Verizon Wireless, which is owned by Verizon Communications Inc. (VZ) and Vodafone Group Plc, as the No. 1 U.S. wireless carrier. Together, AT&T and Verizon control 80 percent of profits in the market, according to the FCC’s annual wireless report published June 27.
A merged AT&T and T-Mobile would have about 132 million connections to mobile wireless devices and more than $72 billion in mobile wireless telecom service revenue, the U.S. said in its complaint.
“Any way you look at this transaction, it is anticompetitive,” Sharis Pozen, the acting head of the Justice Department’s antitrust division, said at a news conference.
Pozen said the department interviewed dozens of people and examined millions of documents before suing and decided to act to stem any speculation about the antitrust review. The department’s “door is open” to discuss a remedy with AT&T, she said.
“This is just the first stage,” Todd Rosenbluth, an equity analyst at Standard & Poor’s in New York who recommends buying AT&T and Sprint. “AT&T could consummate the deal if it announces plans to shed some of the assets where they’ve got some market-share overlap.”
The case is U.S. v. AT&T Inc. (T), 11-01560, U.S. District Court, District of Columbia(Washington).
To contact the reporter on this story: Tom Schoenberg in Washington attschoenberg@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net.
To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net
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