Implications of AT&T and T-Mobile USA Merger

Includes: DTEGY, S, T, VZ
by: Derastone

AT&T (NYSE:T) announced Sunday that it was buying T-Mobile USA from Deutsche Telekom AG (OTCQX:DTEGY) for $39 billion ($25 to $29.2 billion in cash and the rest in stock) and DT taking an equity stake in AT&T (5-8% of T). The transaction value is 7.2x T-Mobile USA’s reported 2010 EBITDA (4.8x including estimated synergies) of $5.45 billion. Management estimates it can extract about $3B in annual synergies and expects the deal to close in 2012.

In case the transaction would not be allowed DT has negotiated:

  • a break-up fee of $US3bn,
  • the transfer of AWS (1.7GHz) spectrum, and
  • a roaming deal. AT&T and T-Mobile have 86MHz and 55MHz of nationwide spectrum respectively.

What are the implications?

  1. Sprint and T-Mobile compete for the postpaid value segment. Thus, consolidation should improve competitive dynamics for Sprint (NYSE:S) in the near-term. Longer term, the entire industry could benefit from an improved industry structure.
  2. If the AT&T / T-Mobile deal is approved, Sprint is locked into the #3 position against a dominant AT&T and Verizon (NYSE:VZ) [in a less competitive industry.]
  3. This deal evidently puts pressure on the towers. AT&T will probably become a net reducer of cell sites in the next 5 years given the improvements in cell density and LTE coverage expansion. Currently AT&T has approximately 10,000 towers and 57,000 cell sites and T-Mobile USA has approximately 6,000 towers and 49,000 cell sites today, of which 31,000 are 3G. The AT&T/T-Mobile USA transaction and Sprint’s plan to shut down the iDEN network could create a 2-4% revenue headwind for the industry long term. For 2010 American Tower Corp. (NYSE:AMT) had about 8% total revenue exposure to T-Mobile USA, CCI 11%, and SBA ~12%.
  4. Spectrum (CLWR.O) will evidently become cheaper as one player disappears from the market. MetroPCS and Leap Wireless will have the opportunity fill that void.
  5. Leaves Clearwire with one less potential partner/client.
  6. Accenture seems to be the consulting company of choice to lead the technology integration.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.