The Obama Justice Department filed suit Thursday to block AT&T’s (NYSE:T) proposed acquisition of T-Mobile USA (OTCQX:DTEGY). The case against the merger is compelling, but I never thought the administration would make the political decision to block the merger.
Perhaps the Justice officials bought into a slippery slope argument: if they don’t say “no” to AT&T buying T-Mobile, how could they say no to Verizon (NYSE:VZ) buying Sprint (NYSE:S). Or maybe it was the strong signs of opposition from the Democrat majority in the Senate.
Even the Wall Street Journal reported that Ma Bell’s efforts to build political support never solved the legal condurum:
If breadth of backers was the main criteria, AT&T's $39 billion purchase of T-Mobile USA would have sailed through regulatory review. … But good corporate citizenry and lobbying expertise aren't the only criteria. And as the Justice Department's court challenge to the deal Wednesday demonstrated, the deal was always long on hype for how it would help consumers, and short on robust legal arguments.
AT&T's problem is that the legal issues aren't on its side. Antitrust lawyers had said in recent days that the company's chances of winning approval rested on political issues trumping legal concerns. The fact that the government challenged—months earlier than observers had expected—demonstrates that the legal issues won the day.
On the most basic level, it was evident before the filing, the combination exceeds concentration of market share levels—as defined by the Herfindahl-Hirschman index—that the federal government generally finds acceptable. Divestitures could resolve the concentration risk, of course. But AT&T will find it harder to get around the reality that a merger would reduce the number of national wireless firms from four to three—in the process eliminating a low-priced competitor.
Given that reality, it’s hard to understand why AT&T claimed to be surprised. Shareholders should demand an immediate investigation as to what Kool-Aid® they’ve been passing out at Whitacre Tower, headquarters for SBC AT&T in San Antonio.
AT&T may fight for half a loaf, but any partial AT&T victory would leave T-Mobile in even weaker shape that when the deal was announced — except for the temporary salve of the $3 billion breakup fee.
The problem is, T-Mobile USA (misleading ads with spokesbabe notwithstanding) has no 4G strategy and has been under-investing in the business as an endgame strategy. It’s too expensive to compete with Metro PCS (or Sprint’s Virgin Mobile) and lacks the phones or service quality to compete with the big three.
Of course, if #2 AT&T can’t buy #4 T-Mobile then #1 Verizon certainly can’t. That leaves #3 Sprint, or perhaps some foreign entrant.
Some may claim that this will force a Sprint-T-Mobile merger, but it’s hard to see how. The two have incompatible technologies, and buying the Nextel incompatible technology almost killed Sprint. Also, Sprint’s market cap today is about $11 billion so there’s no scenario where they could approach AT&T’s $39 billion offer or even the $20-25 billion that analysts estimated last Christmas.
My best guess: T-Mobile AG will run the property further into the ground, with no 4G strategy and its advertising-driven price war. Then in a few years, the world’s richest man (not Mr. Bill) will buy T-Mobile USA for less than half of the $39 billion, and integrate it with América Móvil, Latin America’s most successful mobile phone business. It could put together special roaming agreements for the millions who live and call on both sides of the 30th parallel.
Meanwhile, T-Mobile USA won’t have the spectrum or money to build a 4G network, so someday it will have to rent time on a virtual 4G network, whether Sprint’s partner Clearwire or Leap’s Lightsquared.
I’m (temporarily) a T-Mobile subscriber. I suspect the prices will remain attractive as long as T-Mobile is fighting to preserve its subscriber base and prop up the eventual sale price. I’m curious to see whether T-Mobile will start any price wars, or will remain reactive to MetroPCS and Virgin price wars, but in the end I don’t think it will have any bearing on its survival.