AT&T's Stephenson: It would be a 'stretch' for a Sprint/T-Mobile deal to get approved

AT&T (NYSE: T) CEO Randall Stephenson said it would be a "stretch" for a deal between No. 3 carrier Sprint (NYSE: S) and No. 4 player T-Mobile US (NYSE:TMUS) to get approved by regulators.

AT&T CEO Randall Stephenson

Stephenson

No deal has been officially announced, but rumors continue to swirl that it could be announced sometime this summer. The speculation is that Sprint parent SoftBank would push ahead with a deal worth around $32 billion to merge Sprint with T-Mobile in a bid to gain more scale. However, regulators at the Department of Justice and FCC have signaled their opposition to consolidation among the Tier 1 U.S. carriers.

"The problem as I see it is the way the government shut our deal down. They wrote a complaint and a very specific complaint," Stephenson said Tuesday during an event at the Economic Club of Washington, D.C., according to Re/code. "You're consolidating the industry from four to three national competitors."

He added: "If you think of Sprint and T-Mobile combining, I struggle to understand how that's not four going to three."

In 2011 the DoJ sued to block AT&T's proposed $39 billion bid for T-Mobile on antitrust grounds and the FCC also indicated its opposition to the transaction, which AT&T and T-Mobile parent Deutsche Telekom ultimately abandoned.

SoftBank and its CEO Masayoshi Son would likely make the argument that there are really three major players in the U.S. telecommunications market: Comcast (NASDAQ: CMCSA), AT&T and Verizon Communications (NYSE: VZ). By allowing Sprint and T-Mobile to merge, the combined company would serve as a counterweight in the market and provide more competition. The argument could carry weight as the FCC also contemplates proposed mega-deals between AT&T and DirecTV (NASDAQ: DTV) and Comcast and Time Warner Cable (NYSE: TWC).

T-Mobile and its "uncarrier" brand under CEO John Legere have shaken up the industry with lower prices, no-contract plans, handset upgrade programs and the decision to pay off customers' early termination fees if they switch to T-Mobile and trade in their phones. Those moves have led to financial losses for T-Mobile but also prodigious subscriber growth; the company added 2.4 million customers in the first quarter of 2014 and has added 6.1 million total customers in the last four quarters overall.

"[Regulators] won't want to see that to go away," Stephenson said, according to the National Journal. However, he said he does not necessarily think the merger should be blocked.

"Obviously, if I thought they should approve ours, it would be hard for me to suggest that they shouldn't approve that one," he said.

When AT&T's bid for T-Mobile got blocked, AT&T paid DT $3 billion in cash and another $3 billion in spectrum and a roaming agreement. Reports have indicated a breakup fee in a Sprint/T-Mobile deal could be $1 billion to $2 billion if the deal is blocked. "It's a pretty good business model," Stephenson joked.

On the one hand, AT&T would want to see the deal get blocked because a combined Sprint/T-Mobile would have greater scale to challenge AT&T. According to research firm Strategy Analytics, when excluding wholesale and M2M customers, a combined Sprint/T-Mobile would have close to 100 million customers, giving it more wireless customers than AT&T and coming close to matching Verizon Wireless. The combined firm would lead in terms of a share of postpaid smartphone subscribers but would still trail Verizon and AT&T in both service revenues and EBITDA margins as a percentage of service revenues. Click here for details.

However, if a deal is proposed the FCC has said it may revisit rules for its auction of 600 MHz broadcast TV spectrum, scheduled for next year. Those rules are favorable to Sprint and T-Mobile but could be altered if a deal is put forward, giving AT&T a potential advantage.

For more:
- see this Re/code article
- see this National Journal article

Related Articles:
AT&T CFO: We'd be surprised if regulators approved a Sprint/T-Mobile deal
Report: Sprint brand may go away after T-Mobile merger
Analysts: If Sprint/T-Mobile deal goes ahead, carrier would need to cut prices
T-Mobile's Legere tipped to run a combined Sprint/T-Mobile
Could a Sprint/T-Mobile deal win regulatory approval?
Report: Sprint close to $32B deal for T-Mobile

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