AT&T Takes $4B Hit - Will it Abandon Ship or Find a T-Mobile Lifesavor for it?

By Tony Rizzo — November 25, 2011

AT&T says that it will take a $4 billion charge this quarter over its proposed acquisition of and merger with T-Mobile. Does this suggest that AT&T is beginning to think that the proposed $39B deal may not get the regulatory approval it needs to seal the deal? On the face of it, it certainly does seem that way, but it is far more likely simply a strategy shift.
Both AT&T and T-Mobile have acknowledged that they are withdrawing their merger application they filed with the Federal Communications Commission (FCC). This followed a new roadblock the FCC threw in the deal's path when it stated that it needed to dig deep into the implications of the merger - a move that would delay the deal well beyond its original proposed close dates. AT&T itself now believes there is no way for a deal to close any earlier than mid-2012, but the FCC move puts even that timeline in significant jeopardy.
Why the $4B? Per the original acquisition agreement, if the deal were to fall through AT&T would need to cough up not only $3B to T-Mobile USA parent Duetsche Telecom AG, but some spectrum rights as well in that case - and that is where the additional $1B comes into play here. That is one hefty break-up fee, and the spectrum costs are likely to go much higher than $1B - at the time such onerous terms strongly suggested a high degree of confidence on AT&T’s part that the deal will eventually take place.
Mobile Enterprise believes that AT&T isn't nearly done dealing however. First, the two companies will pull the deal out of FCC hands and deal with the Justice Department in the courtroom early in 2012. Assuming it prevails there the next step will then be to re-introduce the deal to the FCC and pull out all the stops to ensure the deal goes through.
AT&T senior VP of corporate communications Larry Solomon said the company is reviewing all options. That is very likely to mean that AT&T will probably consider and in fact put into play larger divestitures of spectrum and customers than it originally may have thought necessary to win over antitrust skeptics. A Bloomberg report citing unnamed sources noted that AT&T is considering divesting as much as 40 percent of T-Mobile's assets. Some of us believe that AT&T had already planned for this possibility - we believe that the merger is necessary to for AT&T to be able to broadly build out its next generation networks and extend them sufficiently to compete with Verizon.
The problem in the case of any major additional divestitures is the question of who would acquire them. Will the likes of MetroPCS and Leap Wireless be able to pull off buying these assets? It is doubtful without incentives, but AT&T may very well have some "creative" ideas to put on the table. One thing we're sure of is that Verizon certainly won't get them.
It is too early in the game to speculate about winners and losers. That said, our bet is that the deal goes through and that AT&T customers will have a significantly better network in the long run.


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