AT&T announced on Sunday that it had agreed to buy T-Mobile USA from Deutsche Telekom for $39 billion — a deal that would create the largest cellular carrier in the country.
The merger — one of the largest since the onset of the financial crisis — would combine the second and fourth largest cellular carriers in the nation, bringing together AT&T’s 95.5 million wireless subscribers with T-Mobile’s 33.7 million customers.
The transaction, which requires approval from regulators, is expected to be heavily scrutinized in Washington. The deal would leave only three major cellular carriers in the nation: AT&T, Verizon and a much smaller Sprint, which may now be forced to find a merger partner.
Already, some critics say the deal could result in higher prices for consumers. T-Mobile had offered some of the lowest rates in the country. While AT&T is expected to honor current T-Mobile contracts, it is likely that once those expire, T-Mobile customers may have to pay AT&T’s higher rates.
Still, according to the U.S. Government Accountability Office, cellular subscription costs fell 50 percent between 1999 and 2009, a period in which the industry has consolidated.
“Don’t believe the hype,” said S. Derek Turner, research director of Free Press Research, a Washington think tank. “There is nothing about having less competition that will benefit wireless consumers. And if regulators approve this deal, they will further cement duopoly control over the wireless market by AT&T and Verizon.”
From the companies perspective, a deal is a big cost saver. The combined company is expected save more than $40 billion – roughly the price of the deal – over the next three years by shuttering retail outlets in areas where they overlap, reducing the need to build new cellular sites as well as eliminating overlapping back office, technical and call center staff.
Marketing costs, too, could drop. Cellular carriers have been one of the biggest advertising spenders in the nation.
Of course, it all depends on whether the deal gets the O.K. from regulators. Deutsche Telecom was so worried that the deal will not be approved that it pushed AT&T to pay a big breakup fee as a form of insurance, according to people involved in the deal. AT&T agreed to pay Deutsche Telecom a massive $3 billion breakup fee, as well as offer the company spectrum if the deal is blocked by regulators.
In hopes of winning over lawmakers, AT&T has agreed to deploy its fourth generation wireless broadband coverage to 95 percent of the country, including rural and small communities.
The Justice Department is expected to weigh in on the deal, examining the combined company’s share on a market-by-market basis. In some cities, T-Mobile is not among the four largest players, potentially helping AT&T’s case for approval. For example, in Miami, San Francisco and Detroit, Metro PCS has more customers than T-Mobile.
In an interview, AT&T’s chairman and chief executive, Randall Stephenson, said he expects the industry “will continue to be a fiercely competitive market” pointing out that “prices continue to move down.” He also said that in many markets, “on the local level you have a choice of five or more providers. When you get to the facts this a deal that gets approved.”
Under the terms of the deal, AT&T will pay $25 billion in cash and the rest in stock. Deutsche Telekom will in turn gain an 8 percent stake in AT&T and a seat on the telecom giant’s board.
AT&T’s bid will finally solve the problem facing T-Mobile USA, the smallest of the country’s four major cellphone service providers. Both companies operate on the same wireless standard, GSM. Through the deal, T-Mobile will finally gain a path for the next generation of cellphone data, known as 4G, by using AT&T’s forthcoming LTE standard.
Deutsche Telekom had been considering its options for T-Mobile for over a year. It had considered an initial public offering for the company, but shelved it. More recently, it had held talks about selling the unit to Sprint.
The talks with AT&T– which started in earnest back in December of 2010 — heated up in recent weeks amid renewed speculation about a Sprint-T-Mobile tie-up, according to people involved in the talks.
To keep the deal from leaking, the AT&T team had devised a complicated list of code names, known as “Project Auto” to throw people off the scent. AT&T was called “Tesla”; Deutsche Telecom was “Daimler” and T-Mobile was “Mercury.” When asked why T-Mobile was named after “Mercury” – not exactly known as for high-performance vehicles – Mr. Stephenson of AT&T chuckled: “We needed an ‘M.’ Nothing more.”
An army of investment bankers, which are expected to make hundreds of millions of dollars worked on the deal. AT&T was advised by Greenhill & Company, JPMorgan Chase and Evercore Partners, as well as the law firms Sullivan & Cromwell, Arnold & Porter, and Crowell & Moring. Deutsche Telekom was advised mainly by Morgan Stanley. Deutsche Bank and Credit Suisse also acted as financial advisors for Deutsche Telekom. It, too, has hired a bevy of lawyers: Wachtell, Lipton, Rosen & Katz, Cleary Gottlieb and Wiley Rein to handle regulatory issues in Washington. SOURCE