AT&T’s Withdraws FCC Application as T-Mobile Looks Like a $4 Billion Turkey

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AT&T (NYSE:T) announced today that it has withdrawn its application to buy T-Mobile from the Federal Communications Commission (FCC) after the FCC dealt a blow to its plans by announcing that it will hold a court hearing to examine the proposed merger. [1] The FCC had, in its draft order, concluded that the acquisition would lead to massive layoffs, decrease competition and was therefore not in the best interest of the public. [2] However, the company insists that this is not the end of its acquisition plans. It plans to win approval from the Department of Justice (DoJ) first whose antitrust lawsuit is pending hearing in February next year before re-attempting FCC clearance for the merger. If the merger had received sanction from the FCC, it would have catapulted AT&T ahead of both Verizon (NYSE:VZ) and Sprint (NYSE:S) as the #1 carrier in the wireless industry.

T-Mobile stands to gain $4 billion in cash and spectrum assets that AT&T is liable to pay up if the merger doesn’t happen. The company announced that it will make this provision in its Q4 2011 finances in anticipation of the potential penalty fees. [1]

We maintain our AT&T price estimate of $38, which is about 37% above market price.

See our complete analysis for AT&T stock here

Merger doubtful from the beginning

The AT&T-T-Mobile merger has been on shaky ground right from the start. Ever since AT&T announced its intentions to acquire T-Mobile, the company has faced opposition from many quarters, first from the government and then its competitors Sprint and C Spire Wireless, who all filed anti-competitive lawsuits against the merger as they felt the deal would make the U.S. wireless market an effective duopoly, decrease innovation, drive prices up and cut jobs. AT&T and Sprint were involved in a very public face-off, as each tried to sling as much mud on to the other in a bid to garner publicity at the other’s expense. (see AT&T Claims Sprint’s Charges Were Erroneous in Public Spat) The company has until February 2012 to prepare its defense for the hearing of the DoJ lawsuit it still plans to pursue.

Dropping FCC application is probably for the best

AT&T had initially expected to close the merger by March 2012. However, after assessing the increasingly hostile opposition it has met with since it announced its merger plans, the company recently moved that date further by three months. And now, with FCC also deciding to conduct a hearing, we believe the company felt that it may not be able to close the deal by the September deadline. As it became increasingly inevitable that the deal would fall through, the company has decided to stop investing time and money in pursuit of a deal that seemed botched right from the word go. It probably feels its cause would be better served by taking on one opponent at a time, starting with the DoJ first.

Amidst all the bad news that has come out, there is however a silver lining for AT&T. FCC, in its second draft order, has approved AT&T’s purchase of Qualcomm’s wireless spectrum, albeit with a few unknown conditions. [2] However, this is not the final draft. We believe AT&T will now concentrate on getting complete approval for acquiring Qualcomm’s assets first, which might have otherwise gotten delayed with the T-Mobile merger case getting precedence. The company will be planning on using it and its own existing spectrum to roll out its LTE network as soon as possible. Verizon has already pulled ahead in the LTE race and with subscribers increasingly demanding faster data speeds, it is essential for AT&T to hasten its LTE plans if it doesn’t want to lose market share.

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Notes:
  1. AT&T and Deutsche Telekom Continue to Pursue Sale of DT’s U.S. Wireless Assets, Company press release, November 24th, 2011 [] []
  2. FCC unsure AT&T’s T-Mobile deal will create jobs; announces court hearing, BGR, November 22nd, 2011 [] []
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