AT&T may have to settle for weaker T-Mobile tie-up


If AT&T Inc (Dallas, Texas, U.S.A.) fails to convince U.S. regulators that its proposed purchase of Deutsche Telekom AG's (Bonn, Germany) T-Mobile USA should go ahead, the pair may end up having to settle for a lesser relationship.  While it wouldn't be as attractive as an all-out marriage, a network partnership would sidestep the regulatory heat and give the spectrum-hungry companies more capacity to support high-speed wireless services, according to analysts.

"They've done a lot of work with AT&T figuring out the network synergies. They'd be able to achieve a significant amount of that without a merger," says Roe Equity Research analyst Kevin Roe about Deutsche Telekom and T-Mobile USA.

The Justice Department filed suit on August 31 to block the $39 billon deal, citing concerns that it would raise prices for consumers and hamper competition.  AT&T would pass Verizon Wireless (New York) as the largest U.S. mobile service, and the top three U.S. providers would control 90% of the wireless market if the deal succeeds.

The companies are preparing to discuss settlement prospects with the Justice Department at a Wednesday court hearing. But the prospects for a quick settlement are not good.  One source close to the case said there has been no movement toward a settlement and that the deal would have to be substantially restructured to satisfy antitrust enforcers.  Most likely, Wednesday's hearing will just focus on setting a trial date and not produce much settlement progress.

The stakes are high, because the attractiveness of the deal diminishes the longer it is held up in a regulatory review. AT&T has asked for a January 16 trial date, while the Justice Department is pushing for March 19.

People close to the deal say AT&T is working on two tracks, preparing to defend the acquisition in court while restructuring it to make it more palatable to regulators.

Deutsche Telekom is especially motivated for the deal to go ahead because it has already clearly indicated that it wants to exit the U.S. market. Without a good "Plan B," it may be forced instead to stay and invest billions of additional dollars in T-Mobile USA to make it more competitive.  The company also has already laid out plans for spending the $39 billion -- paying down some of its net debt of $57.6 billion, launching a $6.8 billion share buyback and investing in Europe.

"Unfortunately for them I don't think there are any perfect options. They're in a tough spot," says Will Power, an analyst for Robert W. Baird & Co.

At the time it hammered out the AT&T deal, Deutsche Telekom said it had been in talks with five interested parties.  With the AT&T deal at risk, some of those parties -- Verizon Communications, DISH Network and Sprint Nextel -- are still interested in T-Mobile USA, according to a source close to the operator.

But if the Justice Department wins its case to block the sale to AT&T, the second largest U.S. mobile service, the victory could preclude at least two of those companies -- market leader Verizon Wireless and third ranked Sprint -- from swooping in with a counter offer for T-Mobile USA, the fourth biggest U.S. mobile service.

Another option would be for Deutsche Telekom to spin off the U.S. business as a separate publicly traded entity.  But this option, too, is plagued by problems because it would require big operating improvements at T-Mobile USA, which has been struggling with customer losses.

With few good options if the deal gets rejected, BTIG analyst Walter Piecyk says, Deutsche Telekom and AT&T may indeed move ahead with a network sharing agreement, even if it would less financially beneficial to AT&T than a merger.

Deutsche Telekom also could consider pursuing a network agreement with other companies besides AT&T.  Prior to the AT&T pact, T-Mobile USA had been in talks about a spectrum sharing agreement with Clearwire, Sprint's wireless venture with cable operators and owner of one of the largest U.S. spectrum holdings.

But such a deal would require a big investment from T-Mobile USA because Clearwire, which has a massive funding gap, would want an investment in return for access to its network.  That may leave AT&T as a less expensive network partner.

For now, Deutsche Telekom is obliged to act in earnest to get the deal done, especially if it wants to take advantage of the consolation prize -- a break-up fee worth an estimated $6 billion, including spectrum and $3 billion in cash that it will get from AT&T if merger deal is not approved.

The break-up fee would give Deutsche Telekom some short-term leeway but won't resolve its longer-term financial issues.

(Additional reporting by Nadia Damouni in New York, Jeremy Pelofsky in Washington and Victoria Howley in London; Editing by Steve Orlofsky)

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