Wherein John McDermott and Cardiff Garcia try to understand the deal of the day and realise they should’ve gone to law school and become antitrust attorneys.
What just happened?
The Department of Justice on Wednesday morning held a brief press conference to explain its antitrust lawsuit against AT&T’s acquisition of T-Mobile USA and released the accompanying complaint (click through for the full document):
The gist is that the merger would eliminate competition in a market where the big four providers already account for over 90 per cent of mobile wireless connections, and where AT&T and T-Mobile compete directly in all but three of the main 100 cellular marketing areas (CMAs). It would also have given the new firm pretty much a full monopoly on GSM cellphones, according to Felix Salmon.
If you’re into this sort of thing, the Herfindahl-Hirschman Index, a widely used gauge of market concentration, would have exceeded 2,500 in 96 of the 100 CMAs, which according to DoJ equates to a “highly concentrated” market.
Similar concerns were noted in the FCC’s national broadband plan. The FCC hasn’t formally given its ruling on the deal, but the chairman issued a statement that appears supportive of the DoJ’s decision:
Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices.
The complaint also stresses that T-mobile has proved to be an especially uppity upstart, challenging the incumbents on price and leading the adoption of certain handets and operating systems.
T-Mobile sees itself as “the No. 1 value challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market”; and
T-Mobile’s strategy is to “attack incumbents and find innovative ways to overcome scale disadvantages. [T-Mobile] will be faster, more agile, and scrappy, with diligence on decisions and costs both big and small. Our approach to market will not be conventional, and we will push to the boundaries where possible. . . . [T-Mobile] will champion the customer and break down industry barriers with innovations. . . .”
Using T-Mobile’s own success against it — the DoJ, it seems, came to play.
DoJ also scoffs at the efficiences claimed by AT&T and T-Mobile, arguing that they were insufficient to overcome the competition concerns. “The Defendants cannot demonstrate merger-specific, cognizable efficiencies sufficient to reverse the acquisition’s anticompetitive effects,” says the complaint.
So while this is a good day for the US consumer, it’s a bad one for AT&T. It’s made worse by the terms of the proposed deal: AT&T had pledged a $3bn reverse break fee to Deutsche Telekom should regulatory approval note be granted, as well as providing it with additional radio spectrum and 3G roaming arrangements, says the FT. This helps to explain why it looks like it’ll fight the deal. Here’s the statement from Wayne Watts, AT&T’s general counsel:
We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated. We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.
_____
Where did this come from?
It’s hard to see how this could have really surprised anyone.
Sure, there was union support for the deal.
But, overall, opposition was swift and broad. The New York state attorney general probed the deal, and Senator Herb Kohl, chairman of the Senate Subcommittee on antitrust, grilled the two companies’ executives in May and petitioned the FCC to block the deal. The DoJ has cover.
Especially when you consider that AT&T’s motives were undermined… by its own (leaked) letter to the FCC, as spotted by DSLR Reports a month ago:
Yet to get the deal approved, AT&T’s key talking point to regulators and the press has been the claim that they need T-Mobile to increase LTE network coverage from 80% to 97% of the population. Except it has grown increasingly clear that AT&T doesn’t need T-Mobile to accomplish much of anything, and likely would have arrived at 97% simply to keep pace with Verizon. …
For the first time the letter pegs the cost of bringing AT&T’s LTE coverage from 80% to 97% at $3.8 billion — quite a cost difference from the $39 billion price tag on the T-Mobile deal. …
The letter also notes that AT&T’s supposed decision to “not” build out LTE to 97% was cemented during the first week of January, yet public documents (pdf) indicate that at the same time AT&T was already considering buying T-Mobile, having proposed the deal to Deutsche Telekom on January 15. In the letter, AT&T tries to make it seem like the decision to hold off on that 17% LTE expansion was based on costs. Yet the fact the company was willing to shell out $39 billion one week later, combined with AT&T’s track record with these kinds of tactics, suggests AT&T executives knew that 80-97% expansion promise would be a useful carrot on a stick for politicians.
(AT&T told PC Magazine that the letter was “consistent with prior filings” and that AT&T need the deal to lift its coverage from 80 to 97 per cent. Guess we’ll find out soon enough, but the whole letter saga was very strange.)
In any case, AT&T’s big lobbying push this year seems not to have worked.
______
What happens next?
The DoJ’s suit was always a possibility, of course. That’s why there are corresponding clauses in the contract.
Many will muse on whether there is any flexibility in the DoJ language.
But the most important question is simple: do the benefits for AT&T of proceeding outweigh the costs of paying the break fee?
We’re not Anti-trust judicial experts, lest you forget. The analysts notes we’ve seen tend to suggest that the base case remains a compromise deal. We’re not so sure, and it’s secondary to the question of how much AT&T now cares. Of course, it’s currently saying it will vigorously contest the decision.
If it does try to settle with DoJ, it would almost certainly have to divest significant assets.
For AT&T is obliged to make reasonable efforts to get a deal done, including considering divestitures. The deal is complex. But it looks as if AT&T has to at least discuss the possibility of shedding some assets — up to $7.8bn — to try and get the deal through. If these resulted in “adverse effects” of more than $3.8bn, the US giant would be entitled to pay less for T-Mobile.
Things are a bit more complicated for T-Mobile and its parent company, Deutsche Telekom. For one thing, T-Mobile’s CEO had previously told Congress that the deal was necessary to launching its LTE services because DT “is not in a position to finance the necessary large-scale investment in the U.S. for T-Mobile to remain competitive.”
And according to a note from Jefferies, the company might turn to a new suitor:
However, a failure to consume the deal would raise significant strategic questions for DT, the major one being the investment overhang related to a 4G/LTE upgrade (owing to lacking scale). This means DT would likely reconsider a potential deal with Sprint instead, at considerably lower valuations since (a) the asset has weakened in the meantime, (b) market valuations have compressed, and (c) synergies available to Sprint would be far lower than the $40bn touted by AT&T’s management.
Which, along with the damage done to its competitor, may just explain why Sprint is up 6.62 per cent at pixel time.
Related links:
DoJ 2 AT&T: ru 2 big? 
– Lex
AT&T Deal Shows How Different a Private Sale Can Be – DealBook
Justice makes the right decision on AT&T – Felix Salmon