By Paul Goodwin
If you own a cellular phone and live in the U.S., you may have thought you felt the earth move under your feet last Monday. You were right. The announcement that AT&T (T) plans to acquire T-Mobile USA in a $39 billion cash-and-stock deal was a major earthquake in the world of U.S. mobile phone users. Or at least it will be, if the deal is approved by Federal regulators.
This proposed merger of the second-largest wireless carrier in the U.S. (AT&T) and the fourth-largest (T-Mobile) would vault AT&T to the top spot, leaving the previous leader (Verizon (VZ)) in the dust.
Even though AT&T is paying well over the book value for T-Mobile USA (which is a subsidiary of Deutsche Telekom (OTCQX:DTEGY)), the resulting company would enjoy improved cellular coverage throughout the U.S. And since AT&T’s more than 95 million subscribers and T-Mobile’s nearly 34 million all use the same GSM technology platform, the augmented AT&T would be nicely set up for the advent of 4G, the next generation of cellular service. (T-Mobile has no 4G and AT&T has been lagging Verizon in this arena.)
Approval of this deal is no slam-dunk. Market commentators, economists and competitors have been raising alarms about what the deal would mean to U.S. consumers. And they may have a point.
If AT&T becomes #1, the logical step would be for Verizon — which has already begun to sell 4G devices — to gobble up Sprint Nextel (S), which is now the third largest of the four national service providers. So, instead of a competitive landscape with four competitors throwing elbows and trying to attract subscribers with better service and (possibly) lower rates, there would be just two.
Personally, I’d say it’s about a 50-50 chance that the deal will go through.
Cell phones are getting to be an indispensable part of life for many Americans, and bills for cellular service — which includes instant messaging and the truckloads of data in instant messages, pictures, voice mails, videos, songs and movies — are taking a big bite out of budgets, especially when combined with cable TV and Internet service.
And if there’s anyone out there who believes that AT&T’s increased market share and reduced competition will result in lower charges for cellular service down the road, I have some bad news for you.
When institutional stock analysts look at stocks like AT&T, which has a market cap of over $165 billion and brought in nearly $125 billion in 2010, one of the things they look for is a factor called “pricing power.” Pricing power includes items like barriers to entry, intellectual capital and brand loyalty. But the biggest chunk of pricing power is a factor of the number and strength of competitors who will put pressure on everyone in an industry to keep quality high and prices under control. Less competition = more pricing power = a company’s ability to charge more for goods and services.
In terms of national competition, while there are some regional and local providers (like Cricket, MetroPCS (PCS) and others), four competitors isn’t a lot. That’s what happens when you have to have a national network just to get in the game. But the prospect of just two major competitors is pitiful.
AT&T’s stock took a jump from just under 28 at its close on Friday, March 18, to an open near 29 on March 21. Since then, the market has reined in this foolish exuberance, and T is trading right back at 28.
I don’t own any AT&T stock (boring!), but I am an AT&T customer, so I have some skin in this game. Personally, I’m pulling for Federal regulators to knock this deal in the head. It looks to me like the chances of consumers coming out ahead in this deal are somewhere between slim and none.