DOJ's Antitrust Claim Against AT&T Likely To Benefit Consumers - And Either Sprint or T-Mobile

Includes: DTEGY, S, T, VZ
by: Zvi Bar

On Wednesday, the U.S. Department of Justice ("DOJ") filed suit to prevent AT&T (NYSE:T) from acquiring T-Mobile USA for $29 billion. T-mobile is a subsidiary of Deutsche Telekom (OTCQX:DTEGY). The DOJ is concerned that the combination of the second- and fourth- ranked U.S. mobile service providers will hurt competition and raise prices.

The first and third largest providers are Verizon (NYSE:VZ) and Sprint (NYSE:S), respectively. Various consumer groups and Sprint have opposed this merger, while the unions broadly approved it. The DOJ's claim involves antitrust matters. The DOJ has voiced several antitrust concerns this year, including an action to prevent H&R Block, Inc. (NYSE:HRB), the largest U.S. preparer of taxes, from acquiring 2SS Holdings Inc, the developer and owner of TaxACT. The DOJ also voiced concern over the merger between Nasdaq OMX Group (NASDAQ:NDAQ) and NYSE Euronext (NYSE:NYX). These concerns aim to foster competition as to innovation, but primarily involve an interest in keeping prices down.

AT&T has claimed that the proposed M&A activity would provide better service to a larger area, by combining the networks and consolidating future development costs. The DOJ argues that T-Mobile USA is an important market competitor, whose absence would lessen pressure to keep profit margins low and/or improve service. "This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition," according to Deputy Attorney General James Cole.

The DOJ's argument is not a total barrier to the deal, and AT&T will likely have to propose some concessions if it wants to further pursue the acquisition. Such concessions should benefit competition and equate to a gift to Sprint, which would still be a distant third competitor to AT&T and Verizon. If AT&T could somehow strengthen Sprint's condition such that it could more capably compete, then the DOJ may be more accepting of the consolidation.

AT&T was once the only telephone company, known as Ma Bell, and it was split into many parts due to antitrust issues. The resulting "Baby Bells" eventually began to consolidate. Two of the larger regional Bells, Southwestern Bell and BellSouth, created a wireless network that was first called Cellular One, and which was later re-named Cingular. Eventually, and after both acquired other Baby Bells, Southwestern Bell and BellSouth merged together and with AT&T. Verizon was created by Bell Atlantic, which changed its name to Verizon after merging with GTE.

Competition to the Bells came in many forms, but most were acquired. GTE and MCI were acquired by Verizon. Sprint was initially a competitor to AT&T's long distance business but it has since transformed into a mobile service business, much like the Bells did. This transformation included the purchase of Nextel, for which Sprint paid about $36 billion. The DOJ appears to feel that four major national network competitors is good, but that three could be dangerous.

Communication services has been an arms race for quite some time. After spending billions on 3G networks, they are now building 4G networks. This advancement is likely to continue and the DOJ wants that process so that competitors feel the need to constantly improve their product or die.

The costs involved in developing these ever improving networks is a considerable barrier to entry by new competitors. By somehow subsidizing Sprint's ability to compete, the DOJ may be more likely to allow this merger. Alternatively, if the merger does not go through, AT&T will be forced to benefit competition by providing T-Mobile with about $3 billion in break-up fees. At this point, it appears AT&T will have to choose one of these two options.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.

Disclosure: I am long T, VZ, S.