AT&T May Shed 50% of T-Mobile Users

By Scott Moritz and Sara Forden - Nov 30, 2011 4:16 AM GMT+0700

AT&T Inc. (T), under pressure from regulators over its bid for T-Mobile USA, may be willing to shed up to half of the smaller company’s customers to close the deal and gain control of assets including wireless spectrum, analysts said.

AT&T, the second-largest U.S. wireless operator, is weighing the sale of customers and spectrum to address U.S. Justice Department concerns that the acquisition of the fourth- largest operator will undercut competition. The company may propose total divestitures of as much as 40 percent of T-Mobile assets, a person familiar with the plan said last week.

AT&T could sell a higher percentage of T-Mobile’s customers and smaller share of other assets, said Roger Entner, founder of market-research firm Recon Analytics LLC. Most important for AT&T is getting T-Mobile spectrum, or licenses to airwaves that provide more capacity for wireless traffic, he said.

“It’s still a good deal even if they have to give up half the customers,” said Entner. “AT&T desperately needs spectrum in larger cities and would give it up elsewhere.”

AT&T wants to work out an agreement with the Justice Department, which sued on Aug. 31 to block the deal. If the two sides can’t reach a compromise, they’re scheduled to go to trial in February.

AT&T also needs approval from the Federal Communications Commission to proceed with the deal. The company said last week it would withdraw its application for approval to the FCC to focus first on winning clearance from the Justice Department. The FCC said it is considering whether to grant AT&T’s request.

AT&T, based in Dallas, gained 0.4 percent to $28.06 at the close in New York. The stock has dropped 4.5 percent this year.

Smartphone Surge

AT&T, the first U.S. wireless company to offer Apple Inc.’s iPhone, has seen a surge in data traffic as more customers switch to smartphones, which can stream Pandora Media Inc.’s music and Netflix Inc. (NFLX) movies. Data usage on the company’s network has soared 8,000 percent over the past four years and may accelerate over the next four years, Glenn Lurie, emerging devices president, said this month.

T-Mobile’s network could provide AT&T with additional capacity to alleviate the data crunch in short order, Entner said. Buying additional spectrum from the government and then installing network infrastructure to handle wireless calls could take five years or more.

“This deal isn’t about changing the competitive dynamics, it’s about getting spectrum in larger markets as fast as possible,” said Entner, who is based in Dedham, Massachusetts.

Price Change

Divesting 50 percent of T-Mobile’s customers probably makes sense to save the deal, though AT&T is unlikely to go beyond that point, said Colby Synesael, an analyst at Cowen & Co.

“It would be a surprise if it went further,” said Synesael, who has a neutral rating on AT&T. “We are already at the precipice where it is so much divestiture that it stops looking like it worth doing the deal.”

Whether a smaller-scaled deal makes sense for AT&T and T- Mobile parent Deutsche Telekom AG (DTE) will depend in part on how much the original purchase price is reduced. Deutsche Telekom may receive less than the original $39 billion with substantial divestitures.

According to a term in the merger agreement, AT&T would be able to pay less than that value if regulators demand asset sales that surpass 20 percent of the figure, or about $7.8 billion, three people with direct knowledge of the situation said in September. AT&T could walk away from the deal and pay Deutsche Telekom a breakup fee if the concessions requested top 40 percent of that value, the people said.

‘Only Card’

Brad Burns, a spokesman for AT&T, declined to comment. Andreas Fuchs, a Deutsche Telekom spokesman, said the company is bound by the terms of the purchase agreement and declined to comment further.

An AT&T proposal for substantial asset sales may also have a tactical reason. The company could signal that it is making a significant concession to negotiate a solution before the trial date with the Justice Department, said Justin Serafini, an analyst with Height Analytics LLC.

“This is the only card left at this point,” said Serafini, who is based in Washington. “AT&T is hoping that the big asset divestiture will be enough to get an agreement before the trial. If it goes to trial it might be useful to get sympathy from the judge.”

‘Won’t Work’

Even selling off 50 percent of T-Mobile’s customers and a lower percentage of other assets such as spectrum may not be enough to win over the Justice Department, said Robert W. Doyle, an antitrust attorney in Washington. The issue is that selling off such customers won’t necessarily replace the competitive force of T-Mobile, he said.

“The key question that needs to be answered is does the proposed divestiture package replace the lost competition resulting from the elimination of a significant competitor? My answer is a no, it won’t work,” said Doyle, a former official at the Federal Trade Commission.

AT&T and Deutsche Telekom need to find companies willing to buy such a large slice of assets. AT&T has been negotiating over divestitures with regional operators MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP), two people close to the situation said this month.

MetroPCS, the larger of the two, had 9.1 million customers at the end of September and its executives have said they don’t have ambitions for building a national network. Leap had 5.8 million customers, compared with T-Mobile’s 33.7 million.

Little Overlap

MetroPCS operates in just four of the 17 cities where the combined AT&T/T-Mobile would control more than 50 percent of the market, Michael Nelson, an analyst with Mizuho Securities USA Inc. in New York, wrote in a research note yesterday. Leap offers mobile service in six of the 17 cities.

Even with the regional carriers participating in the asset sales it’s “unlikely to be enough to satisfy regulatory concerns,” said Nelson, who put the likelihood of a deal going through at about 10 percent.

AT&T’s proposed acquisition of T-Mobile would create two industry giants in AT&T, with about 137 million subscribers, and Verizon, with about 107.7 million. Sprint had 53.4 million at the end of September.

AT&T’s spectrum shortage argument doesn’t address the Justice Department’s concern with a market that would lose a fourth national competitor, said Serafini.

“I don’t think DOJ could go for any deal that results in only three national wireless providers,” said Serafini.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net: Sara Forden in Washington at sforden@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Michael Hytha at mhytha@bloomberg.net