TBTF & AT&T — a poor combination
James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE, Ala. — We finally have an answer for what kind of financial service only a too-big-to-fail bank can provide: a record-setting loan to fund a takeover that will hugely reduce competition in U.S. wireless communications.
AT&T on Monday said it would pay $39 billion for Deutsche Telekom AG’s T-Mobile U.S. wireless unit, backed by $20 billion of financing from JPMorgan Chase & Co.
The deal, which is subject to regulatory approval, will leave AT&T and Verizon Wireless in control of 80 percent of the U.S. market for contract customers, according to rival Sprint Nextel Corp.
The one-year unsecured bridge loan has an 18-month commitment period, meaning it can be drawn any time during that time when AT&T is ready, and is the largest ever such loan made by JP Morgan Chase, a bank with more than 200 years of institutional history.
While there have been M&A loans this big before, the vast majority would have been syndicated among a consortium of banks to reduce risk.
This is the kind of bridge deal that earned the sobriquet “bridge to nowhere” when so many banks were stuck with them during the last crisis. It is also yet another example of how too-big-to-fail (TBTF) subsidizes banks and encourages risk taking.
Could other banks have made the loan? Perhaps, but they didn’t and it is unimaginable that a bank that was not in receipt of a government guarantee could compete with one that was.
Full disclosure: I am doubly on the wrong side of this deal, both as a customer of T-Mobile who was hoping for some negotiating leverage and as an owner of shares in American Tower, a company which operates towers that carry wireless communications and which will see its negotiating position similarly diminished.
During the long debate about whether the largest U.S. banks, including JP Morgan, should be broken up to make them small enough to fail, the main counter argument was that the U.S. needed huge banks to serve their global clients’ global needs. Well the needs of AT&T were met, but arguably at a cost to consumers and with additional risk being borne by taxpayers.
Of course, if you believe that there is a real subsidy from TBTF status, as I do, then everything a bank does will to some extent be an attempt to leverage that advantage and will therefore leave the taxpayer and economy bearing more risk than they otherwise would if this were a community bank lending to a copy shop.
An un-syndicated deal is much superior from the point of view of AT&T, being quicker, quieter and an expression of confidence on the part of the bank. From JP Morgan’s point of view, it is allowing it to use its balance sheet power to gain access to lucrative investment banking fee business. There is nothing wrong with these activities as such, but there is a grave problem with doing them while being the beneficiary of the special risk status granted by immense size.
As for AT&T, it is selling the deal as a means to serve a growing customer need for wireless data, gaming, video and telephone capacity. That is true, but so is the fact that the U.S. is going to drop from four to just three national carriers. Most local markets have local competitors, but for many people they are not seen as an option.
And if you are someone who wants a national carrier and insists on GSM technology, which works far better internationally, then you will be left with a choice: AT&T or AT&T.
I know that when my contract with T-Mobile runs out in July my negotiating position will be much worse than if it had expired in February, and it is also clear that some of the features I enjoyed may not survive the merger.
“I think it could reach some level of controversy,” said an antitrust expert quoted by Reuters who asked not to be named. “There’s going to be spectrum issues. This is going to be a complex deal and I don’t think it’s a foregone conclusion that it will be approved.”
The deal must be approved by the Federal Communications Committee and the Justice Department, which will examine whether the deal meets antitrust laws.
In the end, the deal may well go through, and perhaps marks a turning point for the M&A market. If you own a lot of assets or work in financial services this is a good deal.
If you are more of a taxpayer and a consumer, not so much.
(Other than those disclosed above, at the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)