AT&T’s Leap Deal May Not Be Enough to Salvage T-Mobile merger

In an earlier article, we had talked about how AT&T (NYSE:T) is looking to divest almost 40% of T-Mobile’s assets in a bid to secure DoJ’s approval for its T-Mobile takeover. We had discussed how that doesn’t address DoJ’s concerns of preserving the fourth largest competitor in the U.S. wireless market. (see AT&T’s Pulling Out All the Stops to Get DoJ Approval) Now, it seems AT&T has responded. In a recent article published by the NYTimes, AT&T is in serious talks with Leap Wireless to sell it T-Mobile’s assets that would include a bigger proportion of customers than spectrum. ^[1] This deal will make Leap the fourth largest in the wireless market behind Verizon (NYSE:VZ), AT&T and Sprint (NYSE:S).

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

See our complete analysis for AT&T stock here

The much-talked about acquisition has been on shaky ground right from the start with opposition from all quarters, including the government and its competitors Sprint and C Spire, who all were of the opinion that the merger would make the market a duopoly, stifling competition and increasing prices for consumers.

However, AT&T, which says that it is in a desperate need of spectrum to bolster its services has tried everything in its power to appease all opposition, including initially agreeing to divest almost 25% of T-Mobile’s assets to address anti-competitive concerns. Now, after assessing the increasingly hostile situation with FCC threatening to drag AT&T to court over the deal, AT&T withdrew its application for merger from the FCC and decided to focus on securing DoJ’s approval first by divesting a bigger proportion of T-Mobile’s assets. (see AT&T’s Withdraws FCC Application as T-Mobile Looks Like a $4 Billion Turkey)

AT&T is planning the divestment in such a way that it still gets enough of the spectrum it so covets while making Leap Wireless the fourth largest wireless carrier in the U.S. market. But we still do not see it helping AT&T’s cause much as the new Leap will not be nearly as big as the older T-Mobile. It still does precious little to address the anti-competitive concerns of the DoJ due to the duopoly of AT&T and Verizon it will be creating in the wireless market.

Also, the cash that Leap will be left with after the asset sale won’t help it compete effectively with the bigger players. Not to forget that Leap has so far been only a regional player that focused mainly on prepaid services for its customers, unlike the smartphones and postpaid services that the current top 4 focus on. We are not sure how intent Leap is on the deal as it will be tough for its management to handle the sudden change in strategy as it will now have to compete on a national level. Also, T-Mobile operates a GSM network while Leap has a CDMA one, which will make the integration for Leap even more complicated.

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1. AT&T’s 11th-Hour Plan to Save Its Deal With T-Mobile, NYTimes, November 28th, 2011 [↩]