Bloomberg News

T-Mobile Antitrust Challenge Gives AT&T Little Recourse

September 01, 2011

(Updates share prices in sixth paragraph. For more on the AT&T/T-Mobile deal, see {EXT6 <GO>}.)

Sept. 1 (Bloomberg) -- AT&T Inc. wouldn’t have much luck trying to salvage its proposed $39 billion takeover of T-Mobile USA Inc. through negotiation with the U.S. Justice Department, leaving a court fight as its only recourse, lawyers said.

The combination of the country’s second- and fourth-largest wireless carriers would violate antitrust law and “substantially lessen competition,” the U.S. said in a lawsuit filed yesterday in federal court in Washington. The Justice Department asked U.S. District Judge Ellen Segal Huvelle to block the deal, the largest announced acquisition of the year according to data compiled by Bloomberg.

AT&T Chief Executive Officer Randall Stephenson in March announced the proposed purchase of Bellevue, Washington-based T- Mobile, a unit of Deutsche Telekom AG. If the transaction falls apart, Dallas-based AT&T would owe the German carrier a breakup fee and concessions worth as much as $7 billion.

“Given the size of the cancellation fee that was negotiated into this agreement, AT&T has the incentive to fight,” said Andrew Gavil, who teaches antitrust law at Howard University in Washington. “The fact that the Justice Department is challenging the deal doesn’t mean they won’t negotiate a resolution at some point.”

‘No Indication’

Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network, a package valued at as much as $7 billion, Deutsche Telekom has said.

AT&T fell 3 cents to $28.45 at 9:47 a.m. in New York Stock Exchange composite trading. Bonn-based Deutsche Telekom’s American depositary receipts declined 1 cent to $12.77. Each ADR represents one ordinary share.

AT&T said yesterday that it was surprised by the government’s lawsuit and that it will ask for an expedited hearing.

“We have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” Wayne Watts, AT&T’s general counsel, said in a statement. He said the company intends to fight the litigation. Deutsche Telekom said it too would contest the suit.

Huvelle has ruled against the Justice Department in antitrust matters before. In 2001, the judge allowed SunGard Data Systems Inc. to acquire Comdisco Inc.’s disaster recovery business for $825 million, rejecting U.S. arguments that the deal would hurt competition.

‘Adverse Impact’

The combination would reduce wireless communication competition in the U.S., driving prices higher, making service worse and offering fewer products for U.S. consumers, the Justice Department said yesterday in a statement.

“AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers,” the department said in the statement. “AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.”

With the acquisition, AT&T would displace Verizon Wireless, which is owned by Verizon Communications Inc. and Vodafone Group Plc, as the No. 1 U.S. wireless carrier. Together, AT&T and Verizon control 80 percent of profits in the market, according to the FCC’s annual wireless report published June 27.

Less Certain

A merged AT&T and T-Mobile would have about 132 million connections to mobile wireless devices and more than $72 billion in mobile wireless telecom service revenue, the U.S. said in its complaint.

“Any way you look at this transaction, it is anticompetitive,” Sharis Pozen, the acting head of the Justice Department’s antitrust division, said at a news conference yesterday. Still, the department’s “door is open” to discuss a remedy with AT&T, she said.

AT&T had been working to bolster its case as analysts became less certain that the acquisition would be approved. A Stifel Nicolaus & Co. survey of 32 polled observers published Aug. 11 found sentiment the deal would win clearance had slipped since early July, with fewer than half saying it would be approved.

Call Centers

“This isn’t just a negotiating strategy, this isn’t just a placeholder, they do mean to block it,” Rebecca Arbogast, a Washington-based analyst with Stifel Nicolaus, said in an interview, citing the detailed federal complaint. “There still is some room for negotiating a settlement, but the likelihood seems narrow.”

The suit may be part of a negotiating strategy, said David Balto, a Washington-based antitrust attorney. The U.S. may have decided “the best way to have strength in the settlement talks is to file a lawsuit,” he said in an interview.

AT&T pledged to bring 5,000 call-center jobs back to the U.S. from other countries once the merger closed and said it wouldn’t cut any U.S. wireless call-center jobs as part of the deal.

“This is just the first stage,” Todd Rosenbluth, an equity analyst at Standard & Poor’s in New York who recommends buying AT&T and Sprint. “AT&T could consummate the deal if it announces plans to shed some of the assets where they’ve got some market-share overlap.”

Bert Foer, head of the American Antitrust Institute in Washington, which opposed the deal, said he didn’t see any room for a settlement.

FCC Request

“They have clearly drawn a line in the sand,” Foer said yesterday in an interview. “If it could be settled, they would still be talking about it,” he said.

The Federal Communications Commission this month asked AT&T for more information about how the deal would expand high-speed wireless service in the U.S. The FCC said that it was continuing its review. In an e-mailed statement FCC Chairman Julius Genachowski said the record before the agency “raises serious concerns about the impact of the proposed transaction on competition.”

AT&T submitted new economic models to the FCC in July that it said showed the merger would reduce prices and increase service in large metropolitan markets. The models offer “further detailed support” for arguments that the merger will lessen strains on the company’s wireless network, lower costs and increase quality, AT&T said in the filing.

“It’s really hard to see how they are going to fix this deal,” said Harry First, a professor who teaches antitrust law at New York University. “I assume AT&T is prepared with economists to show there wouldn’t be price effects, but they have been selling this idea all along without success.”

The case is U.S. v. AT&T Inc., 11-01560, U.S. District Court, District of Columbia (Washington).

--With assistance from Alexandrine Henry and Todd Shields in Washington, Ville Heiskanen in New York, Kenneth Wong in Berlin, Cornelius Rahn in Frankfurt and Crayton Harrison in Mexico City. Editors: Andrew Dunn, Michael Hytha

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Mark Silva at msilva34@bloomberg.net


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