AT&T Inc. (NYSE: T) has agreed to buy T-Mobile USA, the fourth largest wireless carrier in the United States, from Deutsche Telekom AG (FWB: DTE) for $39 billion in cash and stock. The deal has won approval from the boards of directors of both companies but faces scrutiny from the Federal Communications Commission, the anti-trust team at the Department of Justice. The U.S. Congress also will probably have something to say as well.
The agreement calls for Deutsche Telekom to receive $25 billion in cash and the remaining $14 million in AT&T common stock, subject to adjustment. AT&T can increase the cash component by as much as $4.2 billion (with a corresponding reduction in the stock portion), as long as Deutsche Telekom ends up with at least a 5 percent equity ownership interest in AT&T. A Deutsche Telekom representative also would join the AT&T board of directors.
The cash portion of the purchase price will be financed with new debt and cash on AT&T’s balance sheet. AT&T has an 18-month commitment for a one-year unsecured bridge term facility underwritten by J.P. Morgan for $20 billion. AT&T will assume no debt from T-Mobile USA or Deutsche Telekom. The transaction is expected to be earnings (excluding non-cash amortization and integration costs) accretive in the third year after closing.
AT&T expects the deal to close in a year.
AT&T pointed to opportunity to extend its 4G LTE rollout to T-Mobile’s customers as a benefit of the deal. However, another, unacknowledged benefit would be an expansion of AT&T’s current GSM footprint. The carrier’s current coverage has been criticized as inferior to that of its main rival, Verizon.
If consummated, the acquisition would make AT&T the largest wireless carrier in the U.S., followed by Verizon and Sprint Nextel. The company has already gone on the offensive against those who would criticize the deal as anti-competitive. “The U.S. wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal,” the company asserted when it announced the proposed acquisition. AT&T also cited a 2010 report from the U.S. General Accounting Office (GAO) that reported the overall average price (adjusted for inflation) for wireless services declined 50 percent from 1999 to 2009, during a period that saw five major wireless mergers.
However, such rhetoric will likely do little to stave off questions about the effect of the proposed merger on the prices consumers will pay for wireless service. "Consumers have consistently borne the brunt of the increasingly concentrated market for mobile phone service," Senator Herb Kohl (D-WI), chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy, and Consumer Rights, said in a statement posted on his website. "The explosion of cell phone usage -- especially smartphones -- makes competition in this market more important than ever as a check on prices, consumer choice, and service. That's why the Antitrust Subcommittee will take a close look at what this loss of competition will mean for people who increasingly rely on wireless service to connect to friends, family, and the Internet."