AT&T’s T-Mobile Deal May Be Near Death

By Tom Schoenberg and Sara Forden - Dec 13, 2011 12:04 PM GMT+0700

AT&T Inc. (T) may have fended off failure temporarily for its proposed $39 billion purchase of T-Mobile USA Inc. after a federal judge agreed to put on hold a government challenge to the biggest merger announced this year.

U.S. District Judge Ellen Segal Huvelle in Washington yesterday granted a request from both sides to delay the antitrust case, which was scheduled for trial Feb. 13. AT&T has until Jan. 12 to file a report with the court explaining whether it still plans to try to buy T-Mobile, Huvelle said.

AT&T, which last week argued for the trial to go ahead, must say in that report whether it intends “to proceed with the transaction at issue in this litigation” or whether it will pursue a different transaction involving T-Mobile, the judge wrote.

“By agreeing to stay the proceedings, AT&T avoided a potential bombshell -- if the Judge had decided to dismiss the case,” said Allen Grunes, a lawyer for Dish Network Corp. (DISH), which opposes the transaction. “This way, AT&T buys itself 30 days to decide whether to push forward with the trial, to try to settle, or to bow out gracefully.”

AT&T’s report will also explain the status of any related proceedings before the Federal Communications Commission as well as “anticipated plans and timetable for seeking any necessary approval” for a deal from the commission.

‘Deal is Dead’

“They’ve conceded that this deal is dead and signaled that they are going to try and have additional discussions with the Justice Department to see if there’s any kind of alternative deal they would agree to,” said Andrew Gavil, an antitrust professor at Howard University School of Law in Washington. “At the same time, AT&T will have to be in discussions with Deutsche Telekom about whether they are willing to release them from this deal to discuss another deal.”

Huvelle scheduled a hearing for Jan. 18.

Gina Talamona, a Justice Department spokeswoman, declined to comment on yesterday’s order.

“We are actively considering whether and how to revise our current transaction to achieve the necessary regulatory approvals,” Dallas-based AT&T said in an e-mailed statement.

AT&T must pay T-Mobile about $3 billion, as well as spectrum and other services worth about another $4 billion if the transaction doesn’t close by Sept. 20, according to analysts.

Breakup Fee

“Essentially AT&T is now deciding whether to try to come up with a solution to fix the transaction or to just pay the breakup fee and walk away,” said Jeffrey S. Jacobovitz, an antitrust litigator with McCarthy, Sweeney & Harkaway PC in Washington who isn’t involved in the case.

Yesterday’s decision to delay the antitrust trial comes three days after the government said it would move to stay or dismiss the lawsuit due to AT&T’s decision to remove the transaction from consideration by the FCC.

T-Mobile’s lawyer, George Cary, told Huvelle Dec. 9 that without a ruling from the court, AT&T has no chance of completing the purchase.

“If this case doesn’t go ahead, then the deal is over,” he said.

The Dec. 9 hearing marked AT&T’s first appearance in court since it pulled the FCC application on Nov. 24. The company abandoned its bid after the agency’s staff recommended the purchase be rejected and the chairman said he’d push for a review that could last a year.

AT&T said it planned to focus on winning clearance from the Justice Department first or revising its proposal.

FCC Application

Huvelle said at the hearing that without an FCC application in process it might be impossible to meet the deadline for the deal and the trial would be a waste of time.

“We don’t have any confidence that we are spending all this time and effort and the taxpayers’ money and that we’re not being spun,” Huvelle said.

The FCC would probably be involved in any negotiations between AT&T and the Justice Department, Gavil said.

“It doesn’t make any sense to work out a deal and announce it only to have the FCC say, ‘Not interested,’” he said.

The Justice Department sued AT&T and Deutsche Telekom AG’s T-Mobile unit Aug. 31, saying a combination of the two companies would substantially reduce competition. Seven states and Puerto Rico joined the effort to block the deal, which would make AT&T the biggest U.S. wireless carrier.

AT&T Benefit

“Surely DOJ and the judge understand that the longer this plays out, the more it is actually to AT&T’s benefit, because delay can only weaken two of its competitors, T-Mobile (which is immobilized) and Sprint (which is limping),” Albert Foer, president of the American Antitrust Institute, which has opposed AT&T’s acquisition. “I don’t think this will be allowed to play out much longer unless there is serious settlement in the works, which I strongly doubt.”

AT&T has discussed selling as much as 40 percent of T-Mobile’s assets to smaller regional phone companies to help prop up a fourth player in some markets. MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP), are two companies that have been previously named in these discussions.

AT&T’s asset selling strategy would be designed to address Justice’s concerns about competitiveness and show it is interested in reaching an approval through compromise, said Michael Nelson, an analyst with Mizuho Securities USA Inc. in New York, who has a “buy” rating on the shares.

Approval Obstacles

“They would like to come back with some sort of solution that would please Justice,” Nelson said yesterday in an interview.

Still, even heavy divestitures in local markets may not be enough to win regulatory approval, said James Ratcliffe of Barclays Capital in a Dec. 9 report.

“We’re very skeptical that AT&T and T-Mobile can come up with sufficient divestitures to satisfy the DOJ,” Ratcliffe wrote. “Our analysis shows that even divesting half of T- Mobile’s subscribers to Leap and MetroPCS would still leave the vast majority of U.S. wireless customers in markets” where concentration is higher than the Justice Department’s ceiling, said Ratcliffe who has a “neutral” rating.

The case is U.S. v. AT&T Inc., 1:11-cv-01560, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net

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