Wireless Consolidation By AT&T & T-Mobile Fraught With Risks

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With growth slowing in a saturated wireless market, the incumbents are looking at ways to consolidate and grow through acquisitions. While none of the carriers has so far gone public with any such plan, the rumor mill has been at work ever since AT&T (NYSE:T) called off its T-Mobile acquisition. In the latest speculation, we have a Reuters report claiming that AT&T and Leap Wireless have held merger talks in the past few months. [1] This comes on the back of a Bloomberg article that linked T-Mobile and MetroPCS in another acquisition rumor early last week. While the spectrum crunch situation and increasing demand for data services does call for industry consolidation, the deals being proposed by the media make little sense.

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Incompatible networks

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AT&T and T-Mobile are both GSM players, unlike the smaller CDMA players MetroPCS and Leap. Mergers and acquisitions are all about creating synergies and benefiting from economies of scale. However, merging two incompatible networks would lead to neither and will further increase overhead expenses for the larger carriers. If AT&T and T-Mobile go ahead with the acquisitions, not only will they have to offer separate handset portfolios but will also need to maintain different networks. We have already seen how that worked out for Sprint, which is now shutting down the iDen network that it had acquired from Nextel after seeing subscriber losses for many years.

The only reason why AT&T and T-Mobile might even be remotely interested in these deals is the additional spectrum that they might get for their respective LTE rollouts. They also need the spectrum to meet the growing demand for data services with higher speeds and congestion-free networks from an increasing base of smartphone subscribers. Moreover, with regulators maintaining a hawkish stance over any large-scale acquisition, it is more prudent for carriers to go after smaller players in the industry.

Deals highlight wireless plight

However, both Leap and MetroPCS are regional level players and have small spectrum holdings in mostly mid-sized markets across the U.S. They have market caps of $450 million and $2.6 billion, in addition to net debt levels of $2.6 billion and $2.5 billion, respectively. What this essentially means is that AT&T and T-Mobile will get only a small amount of additional LTE spectrum and an incompatible CDMA network for more than $3 billion and $5 billion, respectively (without considering the market premium for the deals to take place), making the rumored deals highly improbable.

But if the talks are for real and the national carriers are indeed willing to go for the risky deals, it highlights the huge growth challenges that the increasingly saturated wireless industry is currently facing. We believe the FCC needs to take cognizance of these issues by finding a way of bringing the wireless spectrum hoarded by the cable companies back into play through the Verizon-cable deal. (see The Verizon-Cable Deal Will Go Through Despite FCC Delays)

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Notes:
  1. AT&T, Leap talked merger in recent months -sources, Reuters, May 10th, 2012 []