What does the DOJ's suit mean for the AT&T/T-Mobile deal and beyond?
The Department of Justice's decision to sue to block AT&T's (NYSE:T) proposed $39 billion acquisition of T-Mobile USA is still reverberating in the wireless world. Analysts described a range of possible outcomes, including a decision by AT&T to spell out conditions and divestitures it might accept, or the government losing its case outright.
In its filing, the Justice Department clearly stated that the deal would have "nationwide competitive effects across local markets" and that the deal needs to be evaluated on national as well as local grounds. "T-Mobile in particular--a company with a self-described 'challenger brand,' that historically has been a value provider, and that even within the past few months had been developing and deploying 'disruptive pricing' plans--places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition," the filing states.
AT&T said it was blindsided by the lawsuit and that it will "vigorously contest this matter in court."
The Justice Department's aggressive filing--coming in the middle of the FCC's own review of the deal--suggests that the government may be looking for AT&T to spell out what it might divest or what conditions it might accept to get the deal completed. "You would be able to enter this new phase in which litigation and negotiation would be intertwined and the Obama administration would have maximum leverage," said Jeffrey Silva, an analyst at Medley Global Advisors.
At a news conference Wednesday, Sharis Pozen, the acting chief of the department's antitrust division, said that "any way you look at this transaction, it is anticompetitive." However, she left the door open for a possible settlement. "We apprised them of our serious concerns, and as any party can do, our door is open," she said. "If they want to resolve those concerns, we can certainly do that. Here we filed a lawsuit and we'll proceed in court. We'll see what happens next."
According to a Bloomberg report, which cited an unnamed source, AT&T plans to propose remedies that would make the deal more palatable to the Justice Department. The report said there was no internal debate within AT&T on whether to fight for the deal. T-Mobile parent Deutsche Telekom also indicated it does not have any fallback options and intends to fight for the deal.
The Justice Department and the FCC have leverage over AT&T in part because AT&T will have to pay Deutsche Telekom $6 billion in cash, spectrum and roaming agreements if the deal falls through.
"If I view this as a business negotiation, then this strengthens the FCC's hand to get AT&T to accept additional divestitures as well as guaranteeing coverage in other areas, and I'm thinking rural areas in particular," said TBR analyst Ken Hyers.
However, Silva said that if the government loses the case on an appeal, there is a risk that the deal could be approved without any conditions attached.
Hyers said that it's unclear how the two sides will play their cards going forward. "At this point, do we have a game of brinksmanship where AT&T does try and stare down the DOJ? Or do we see them [AT&T] coming back and giving more [in concessions] than they wanted to initially?" he said. "I think AT&T will ultimately negotiate. I think this deal still goes through in some form."
Aside from the effects the action has on AT&T, there are also implications for the rest of the industry, most notably Sprint Nextel (NYSE:S), which has been the most outspoken opponent of the AT&T/T-Mobile deal. "If T-Mobile remained independent, it would likely result in increased competition for Sprint and MetroPCS (NASDAQ:PCS)," BTIG analyst Walter Piecyk wrote. "A bumpier approval process could also instigate T-Mobile to be more price aggressive in the interim as the uncertainty of an approval will making maintaining the customer base more important."
Piecyk also wrote that MetroPCS will continue to take market share with or without the AT&T/T-Mobile deal going through.
- see this DOJ complaint (PDF)
- see this WSJ article (sub. req.)
- see this BTIG blog post (reg. req.)
- see this Bloomberg article
- see this separate Bloomberg article
- see this speech by Acting Assistant Attorney General Shairs Pozen
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