Obama’s watchdogs call AT&T’s $39 bln wager
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The Obama administration has called AT&T’s $39 billion wager on T-Mobile USA. The No. 2 U.S. mobile company bet it could persuade regulators that buying No. 4 T-Mobile would benefit consumers. The U.S. Department of Justice senses a weak hand and has sued to block the deal. With the industry a near duopoly, the government’s read looks right. AT&T isn’t folding but looks on the verge of a bad beat.
The benefits of the deal were never in question. First, AT&T estimated the value of the synergies from buying T-Mobile were greater than the purchase price. In addition, the combination would help deploy limited airwaves more efficiently, a meaningful step given the increasing demand for spectrum and its limited supply.
Yet it was never clear the savings would be passed onto customers and how fast AT&T would build out its wireless infrastructure. Trustbusters at the DOJ have decided that eliminating T-Mobile raises the risk AT&T will simply act like a sleepy rent-seeking monopolist, keeping rates high and rolling out infrastructure slowly.
They have good reason for their suspicions. T-Mobile has fiercely competed on price nationwide and its presence has encouraged big companies to push out new services. If AT&T subsumes the U.S. division of the German Deutsche Telekom, it risks eliminating an important industry check.
True, smaller networks such as Leap Wireless and MetroPCS are strong in areas like cheap prepaid mobile service. But their ability to compete is limited. The telecom industry offers especially strong economies of scale, meaning the rich and big players tend to become bigger and richer. If the AT&T deal goes through, the two largest companies would control about three-quarters of all revenue in the mobile industry, and according to Sanford Bernstein, more than 90 percent of free cash flow.
AT&T is going all in now, preparing to fight regulators in court. It has $6 billion in cash and goodies it has promised T-Mobile on the line if the deal doesn’t go through. But because the market is already a functional duopoly means large disposals will probably be the least AT&T needs to do. Other remedies, such as promises of passing savings onto consumers, look less helpful now given the DOJ’s argument. Unless AT&T has some unexpected ace up its sleeve, it appears to have misplayed this lucrative hand.