AT&T (NYSE:T) announced its proposed acquisition of T-Mobile in a cash and stock offer valued at roughly $39 billion. This is a significant announcement given the size of the two companies and since there was speculation that Sprint (NYSE:S) might look to acquire T-Mobile. Sprint’s shares were down 14% on this news. AT&T’s move pits it firmly against Verizon (NYSE:VZ) as both operators continue to build out their 4G networks. Our price estimate for AT&T’s stock stands at $35.80 which is around 40% ahead of the market price.
Our Quick Take …. Problems, But Potential
- Key Takeaways From AT&T’s Q1 Earnings
- AT&T Q1 Preview: Will Postpaid Phone Subscriber Adds Turn Positive?
- How Has Postpaid Churn Of The Major U.S. Wireless Carriers Trended In Recent Years?
- How Have The Prepaid Subscriber Bases Of The Big Four U.S. Carriers Trended Over The Last 5 Years?
- How Have Postpaid Subscriber Bases Of The Big Four U.S. Carriers Trended Over The Last 5 Years?
- An Overview Of AT&T’s Connected Device & IoT Business
If we compare AT&T and T-Mobile’s voice and data coverage charts, it looks like there are no material additions to AT&T’s coverage. In other words, T-Mobile’s presence is not significant in any places where AT&T is not. Additionally, T-Mobile’s customers have lower ARPU (average revenue per user) of $52 compared to AT&T’s overall average ARPU of $62.57.  T-Mobile also has higher churn and lower wireless profit margins around 29% compared to AT&T’s 41% and churn stood at 3.4% compared to AT&T’s 1.3%. 
So why did AT&T then buy T-Mobile?
It’s All About Spectrum
As the company mentions, its all about spectrum and the race for 4G. AT&T and T-Mobile have similar GSM network with HSPA+ deployed making it easier to integrate, but the treasure lies in the additional spectrum that AT&T gets which will enable to company to extend LTE to more customers than it had originally planned. The spectrum holdings per subscriber (Mhz per million subs) for AT&T stood at 0.86, the least among the major U.S. wireless carriers. 
The company thinks that this is not enough to handle future traffic, and T-Mobile’s spectrum holdings offer a solution for the company. AT&T expects to gain synergies and move forward in the race for LTE deployment. This could well turn out to be a good move for the company as Verizon is ahead in terms of LTE deployment right now. With this boost, AT&T could have better LTE coverage to even the race.
In the short-term, the acquisition will help expand AT&T’s market share by a significant amount, but it will also put pressure on data ARPU and margins. However as the race for LTE intensifies, this broader deployment could be the kick AT&T needed.
- AT&T and T-Mobile Comparison, mobilizeeverything.com, 2010 data [↩] [↩]
- Mobile broadband explosion and pressing demand for spectrum, mobilizeeverything.com [↩]