Will regulators approve the AT&T/T-Mobile USA deal?

One of the biggest questions hanging over AT&T's (NYSE:T) proposed agreement to buy T-Mobile USA for $39 billion is whether government regulators will approve the deal, and what AT&T will be required to divest if they do so. The deal, which will combine the nation's No. 2 and No.4 wireless carriers, will need to be approved by both the FCC and the Department of Justice.

AT&T clearly anticipates tough scrutiny; in announcing the deal, AT&T provided a detailed analysis of the competitive nature of the U.S. wireless market, and argued that its merger with T-Mobile wouldn't stifle that competition.

Interestingly, AT&T is so certian it will be able to complete the deal, it agreed to a significant breakup fee. "In the event the transaction does not receive regulatory approval satisfactory to AT&T and the transaction does not close, AT&T will be required to pay a breakup fee of $3 billion, transfer to T-Mobile certain AWS spectrum that is not needed by AT&T for its initial LTE roll out, and provide a roaming agreement to T-Mobile on terms favorable to both parties," AT&T said.

Analysts though were divided over the prospects for regulatory approval. Credit Suisse analyst Jonathan Chaplin called the regulatory concerns "enormous," noting the new company will have 129.2 million wireless customers--about a third more than Verizon Wireless (NYSE:VZ) and more than double the subscriber count of Sprint Nextel (NYSE:S). Chaplin said AT&T may be willing to make "massive divestitures and concessions" to get the deal approved.

AT&T CEO Randall Stephenson said on a conference call about the deal that AT&T did not want divest assets to get the transaction approved. But, according to a report in the Wall Street Journal citing an unnamed source close AT&T, the company is willing to divest "substantial" parts of its wireless subscriber base in certain markets.

Indeed, such divestiture has precedence: Verizon Wireless was forced to divest billions of dollars of assets to get its acquisition of Alltel approved--assets that were subsequently purchased by AT&T.

Representatives from the FCC and the Department of Justice declined to comment.

"AT&T and T-Mobile must be confident that they will get regulatory approval," Current Analysis analyst William Ho said. "Consumer groups are likely to cry foul, but under the notion that they can drive digital broadband to the rural parts of the U.S., it is positioned to dovetail with the administration's recent announcement and efforts."

Indeed, Stephenson made that very point during the conference call, explaining that the combination of AT&T and T-Mobile will be able to deliver LTE service to 46 million more Americans than they could separately, in part by using T-Mobile's AWS 1700 MHz spectrum for LTE in suburban and rural areas.

AT&T General Counsel Wayne Watts said, and antitrust lawyers generally agree, that regulatory approvals of this kind are conducted on a market-by-market basis, and he pointed out that in 18 of the top 20 U.S. markets, consumers have the choice of five or more wireless carriers.

Watts also argued the combined entity will support the public with better voice and data services, and its LTE rollout will help meet the FCC and Obama administration's broadband deployment goals. President Obama has said he wants to bring broadband to 98 percent of Americans; AT&T promised to deliver LTE service to 95 percent of Americans at some point in the future via its merger with T-Mobile.

However, many in the market are already crying foul over the deal, arguing that the wireless market is veering dangerously toward a duopoly controlled by Verizon and AT&T.

Phil Marshall, an analyst with Tolaga Research, pointed to the HHI Index, which is commonly used to measure market concentration. Basically, he said, if a market is between 1,000 and 1,800 on the scale, the market is moderately concentrated. If it is above 1,800, the market is considered concentrated.

"Before the AT&T/T-Mobile deal the HHI index is around 2,600, after the deal it will increase to around 3,300," he said. "Clearly we have a market with pretty high concentration with or without this deal. The question is whether the regulators believe they can stifle the continued market progress towards a duopoly, whether this deal occurs or not, and more importantly whether this has a negative impact on the consumer experience. Also, if the deal does go ahead, does it mean the Verizon would have a legitimate case to purchase Sprint sometime in the future?"

Sprint has spoken out against the deal, and said in a statement that if approved, the wireless industry will be "dominated overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless postpaid market, as well as the availability and price of key inputs such as backhaul and access needed by other wireless companies to compete. The DOJ and the FCC must decide if this transaction is in the best interest of consumers and the US economy overall, and determine if innovation and robust competition would be impacted adversely and by this dramatic change in the structure of the industry."

Complete Fierce coverage of AT&T/T-Mobile:
--AT&T to buy T-Mobile USA for $39B
--AT&T/T-Mobile merger scrambles long-term handset picture
--What happens to Sprint, Clearwire and LightSquared? AT&T + T-Mobile USA ramifications
--Is acquiring T-Mobile USA the answer to AT&T's data demands?
--AT&T, T-Mobile USA merger as much about HSPA as it is about LTE
--After AT&T deal, Deutsche Telekom to refocus on Europe

For more:
- see this WSJ article (sub. req.)
- see this WSJ article (sub. req.)
- see this Forbes article

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