AT&T’s T-Mobile Deal Almost Dead, Spectrum Hunt to Continue

AT&T’s (NYSE:T) T-Mobile acquisition seems all but dead now. The company and Deutsche Telekom, T-Mobile’s parent, announced Monday that they have asked the District Court Judge to stay any further hearings until January 18th, 2012 so that they could “evaluate all options.” ^[1] This comes after the Justice Department announced its intentions to postpone or dismiss its lawsuit seeking to block the deal. The DoJ believes that with AT&T’s withdrawal of its merger application with the FCC, it has no reason to pursue the case.

With this delay it is seeming increasingly unlikely that the merger will go through in its current form before the September 20 deadline next year. AT&T is looking for other ways to revive its attempts at securing the additional spectrum it says it needs to compete with Verizon (NYSE:VZ) and Sprint (NYSE:S) in the wireless market.

Our $38 price estimate for AT&T stock is about 30% above the current market price.

See our complete analysis for AT&T 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. The first challenge came from the Department of Justice and then 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 up prices and cut jobs.

After assessing the increasingly hostile opposition that it has faced since announcing the deal, the company decided to withdraw its application from the FCC  and focus on securing DoJ approval first. (see AT&T’s Withdraws FCC Application as T-Mobile Looks Like a $4 Billion Turkey) Now that the DoJ hearings are also likely to be postponed, AT&T is going to have a lot of difficulty closing the deal before the deadline. However, the fact that the company hasn’t given up on the deal yet shows just how desperate AT&T is for more spectrum. See our note: Dish Networks Dish Could be a Key Beneficiary of AT&T’s Hunt for Spectrum

AT&T in desperate need of additional spectrum

The wireless market is mostly saturated now with the number of wireless subscriber connections (327.6 million) exceeding the total population (315.5 million) in the United States. ^[2] So AT&T’s focus is now on retaining customers and and taking market share from rivals. This is only possible if the company has enough spectrum to provide higher speeds with less congestion, to the increasing number of smartphone users.

Additionally, Verizon’s proposed $3.6 billion acquisition of SpectrumCo’s wireless assets for its LTE network makes the play for additional spectrum even more crucial for AT&T. If the merger goes through it will vault AT&T ahead of Verizon as the largest wireless carrier in the U.S. market. However, without the deal its market share could decline or stagnate as it would struggle to provide speeds and coverage comparable to those of Verizon. We believe the company is now trying to salvage the deal in some, likely reduced, form as well as looking for spectrum elsewhere to meet its needs.

T-Mobile stands to receive $4 billion in cash and spectrum assets from AT&T if the merger doesn’t happen. AT&T has prepared for this increasingly possible scenario by recording a provision in its Q4 2011 numbers for the potential penalty fees.

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1. AT&T asks Justice Department to delay court proceedings, BGR.com, December 12th, 2011 [↩]
2. CTIA Semi-Annual Survey Reveals Historical Wireless trend, October 11th, 2011 [↩]