By Robert Gordon
As even a casual observer of the telecom industry knows, time means change. The industry has seen more than its fair share of consolidation, divestiture, and name changes. And there is no sign that this is going to change anytime soon. The failure of AT&T’s (NYSE:T) proposed purchase of T-Mobile Wireless will undoubtedly promote several moves by both companies. I am going to approach it from AT&T's perspective.
AT&T Inc's pursuit of T-Mobile (a division of Deutsche Telecom, AG (OTCQX:DTEGY), has apparently ended in dismal failure. This failure, announced December 19, 2011, was ushered in by antitrust complaints by the U.S Department of Justice (DOJ) and the Federal Communications Commission (FCC). It actually leaves AT&T worse off than it was before it ever announced, in March 2011, its plan with T-Mobile. AT&T, perhaps blinded by its own arrogance, seemed not to anticipate the government's challenges to the merger. It also leaves me wondering, what is AT&T's next move?
As a contractual penalty for the collapse of the merger, AT&T will pay T-Mobile $3 billion in cash, and give T-Mobile at least $1 billion worth of spectrum rights. The two companies have also entered into a 7-year roaming agreement, which will aid T-Mobile far more than AT&T. At the December 19th press conference, there were allusions to “mutually beneficial” actions, and whether that extends beyond the roaming agreement is anyone's guess at this point. I expect that almost any “joint” venture in excess of the already agreed roaming deal would have to pass DOJ scrutiny, and I don't know that AT&T is eager to go in that direction again anytime soon.
The most important part of the failed merger, from AT&T's perspective, is that the acquisition of T-Mobile would have added much needed spectrum to the AT&T network. Now, those spectrum needs will have to be addressed in some other manners. In December 2010, AT&T reached an agreement with Qualcomm, Inc. (NASDAQ:QCOM) to buy spectrum access for about $1.9 billion. The FCC slow played this during the pendency of the AT&T / T-mobile deal. But with that deal off the table, and the FCC “shot clock” running, I would be surprised if this deal were not approved, even if it were just a consolation prize to AT&T.
Other issues that will make it unlikely that AT&T can pursue any sort of large, domestic company are, there just aren't that many companies left that would make a material impact to AT&T. Especially given that DOJ seems now to want to enforce antitrust law, any deal involving tens of millions of subscribers would not be allowed during this political climate. So too does AT&T's technology make life more difficult. Its network is based upon Global System for Technology (GSM). Verizon Wireless' (NYSE:VZ) system is based upon Code Division Multiple Access (CDMA). One reason apart from spectrum that AT&T wanted to acquire T-Mobile is that it too uses GSM technology. Most other regional wireless companies in the United States use CDMA. The only large regional carrier that used GSM, Centennial Wireless, was acquired by AT&T in 2010. While 80% of the world uses GSM technology, outside of AT&T and T-Mobile, only two other of the top twenty wireless companies in this country, and none of the top ten, use GSM.
Most of the other companies in the top ten in the United States apart from Verizon Wireless, AT&T, Sprint Nextel Corp. (NYSE:S) and T-Mobile are prepaid companies, such as Tracfone, the fifth largest wireless provider that is owned by America Movil SAB (NYSE:AMX), and MetroPCS (PCS), the next largest domestic, one that is also is exclusively a CDMA carrier. The largest telephone provider out there with a GSM platform and a postpaid customer base is Cincinnati Bell, Inc. (NYSE:CBB) But CBB also carries a relatively large wireline business with it, and I do not see AT&T wanting to spend money to purchase additional landline customers.
What is left is dozens of smaller, niche companies that run GSM. These include companies like Syringa Mobile in Idaho, or CGI Communication Inc. (NASDAQ:GNCMA) in Alaska. But it would take many companies of that ilk to make any real impact on AT&T.
So, without buying additional customers, AT&T must find a way to find additional radio spectrum to avoid problems it has had for many years in places like Manhattan, and San Francisco. There is a growing movement afoot among academics that the entire radio spectrum needs to be torn down and rebuilt. Short of that, AT&T might want to take a long look at LightSquared Inc. In 2010, it set about to build a market leading, high powered 4th generation, long term evolution (4G LTE) nationwide. The build up of the network has not gone smoothly. The company has perhaps lost the support of its major benefactor, Philip Falcone, who has his own troubles now over allegations of improper political contributions. And if Falcone is either unable or unwilling to pump more money into LightSquared, it is pretty much game over except for liquidation of LightSquare's principal asset, its spectrum holdings.
AT&T rather obviously has money to spend. If it wanted T-Mobile for $39 billion largely for its spectrum, then it can likely find spectrum, without the customers, for far less.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.