Telco Consolidation In The US: AT&T Buys T-Mobile For $39B
AT&T plans to pay $39 billion to buy Deutsche Telekom AG's T-Mobile USA in a deal that is expected to attract intense regulatory scrutiny as it creates a new U.S. mobile market leader.
AT&T, the No. 2 U.S. mobile service, is looking to bolster its constrained network against a near insatiable appetite for videos and data from devices such as Apple Inc's iPhone and iPad users.
But the world's largest deal announced so far this year, which will bump Verizon Wireless from its No. 1 U.S. position, could raise the ire of U.S. consumers and regulators as analysts expect it to result in wireless service price increases. Consumers currently look to T-Mobile USA for some of the best value wireless service rates.
The transaction will increase AT&T's U.S. market share to an estimated 43 percent from 32 percent, putting it well ahead of Verizon Wireless's current 34.5 percent share of U.S. mobile customers, according to Tolaga Research estimates. AT&T will add 34 million customers to its current 96 million subscriber list.
As a sign of AT&T's confidence the deal will pass regulatory muster, it agreed to pay an unusually high breakup fee of $3 billion and to give T-Mobile USA wireless airwaves if regulators reject it. But they may be over-confident.
"I think it could reach some level of controversy," said an antitrust expert, who worked for the Justice Department's antitrust division. "There's going to be spectrum issues. This is going to be a complex deal and I don't think it's a foregone conclusion that it will be approved."
AT&T said it expected regulators to require it to sell some assets as a condition of approving the deal, which it hopes to complete in 12 months.
But another regulatory expert said it could take as long as 18 months for U.S. competition and communications regulators to review the transaction.
"I certainly wouldn't say that this is a clean deal," said an antitrust expert with telecommunications experience. AT&T Chief Executive Randall Stephenson told reporters on a conference call that AT&T had done its "homework" on the regulatory front and boasted that the deal could generate savings of more than $40 billion.
"This is a unique opportunity." said Stephenson. "It's rare you have a transaction where the synergies are greater than the price paid."
The companies have been talking for months according to sources familiar. Stephenson reached out to Deutsche Telekom CEO Rene Obermann in December, according to one source, who said he drove the process from the AT&T side. The substance of the deal came together over the last month, and the companies had a handshake agreement a week ago, the source said.
TALKS SINCE DECEMBER
The transaction, which is Stephenson's first big acquisition since he took over as CEO, will give AT&T much needed spectrum, or wireless airwaves, to provide the capability to support surges in the delivery of video, games and entertainment to smartphone and mobile devices.
Stephenson said he had to "think differently" to address an expected eight-to-tenfold increase in demand for wireless network capacity in the next five years.
It comes as U.S. wireless operators fight for wireless airwaves that are in short supply as consumers spend more time conducting video chats, playing games and downloading applications over mobile devices that rival the powers of desktop computers of just a few years ago.
The two top operators -- a much larger AT&T and Verizon Wireless -- will account for nearly three out of four mobile subscriber in the United States, according to Forrester Research analyst Charles Golvin.
For Deutsche Telekom, the attractively valued deal terms of an estimated 7.1 times multiple of 2010 adjusted earnings before interest, tax, depreciation and amortization, gives it a tidy partial exit from the U.S. market that once held great promise at the turn of the millennium, but led to steep stock declines.
Under the current terms of the deal, Deutsche Telekom could become AT&T's largest shareholder with an 8 percent stake. Left unanswered is the fate of smaller rivals, namely Sprint Nextel, which had held talks to combine with T-Mobile USA, the No. 4 U.S. mobile service. "Other reported deals involving T-Mobile would have joined together incompatible networks," said Larry Cohen, head of CWA the main U.S. telecommunications workers union. "Not only would that have forced a rebuild, but would have required new phones for T-Mobile customers."
The purchase price includes a cash payment of $25 billion with the balance to be paid using AT&T common stock. AT&T has the right to increase the cash portion of the purchase price by up to $4.2 billion.
As part of the deal, which was approved by both companies boards, a Deutsche Telekom representative will join the AT&T board. AT&T can increase the cash component so long as Deutsche Telekom retails at least a 5 percent equity stake in it.
Deutsche Telekom is expected to use 5 billion euros to buy back shares and 13 billion euros to lower its debt, one source with direct knowledge of the deal discussions told Reuters. The source said no other deals are planned in the medium term. AT&T said it would finance the cash portion with new debt and cash on AT&T's balance sheet. AT&T has an 18-month commitment for a one-year unsecured bridge term facility underwritten by JPMorgan Chase & Co for $20 billion.
AT&T will not assume any T-Mobile USA debt and that the deal would add to earnings, excluding non-cash amortization and integration costs, in the third year after closing.
Representatives from the U.S. Federal Communications Commission and Sprint declined comment as did officials from Verizon Wireless, which is owned by Verizon Communications and Vodafone Group Plc.
Greenhill & Co, JPMorgan Chase and Evercore Partners acted as financial advisors to AT&T. Morgan Stanley, Deutsche Bank and Credit Suisse acted as financial advisors to Deutsche Telekom.