The ambitious $39 billion proposed mega-merger of AT&T Inc. (T) and T-Mobile USA, a unit of Deutsche Telekom, faces huge opposition.
Sprint Nextel Corp. (S), the third-largest U.S. wireless carrier was the first to raise a voice of protest. Now, MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) have also joined the league of opposition. MetroPCS and Leap are the prepaid wireless service providers in the U.S.
According to these companies, the combination of the second and fourth wireless operators will create America’s largest mobile phone company surpassing the present leader, Verizon Wireless, a joint venture of Verizon Communications Inc. (VZ) and Vodafone Group Plc (VOD). The companies also fear that the collaboration will mellow down innovation and investments in the industry and eventually affect customers.
The proposed merger would further moderate competition, making AT&T and Verizon Wireless the only two dominant players in the industry, controlling almost 80% of the U.S. wireless post-paid market. Post-merger, AT&T will become the largest carrier with 130 million subscribers. Going by current numbers, Verizon holds the top position with almost 100 million subscribers followed by Sprint with a modest base of 50 million wireless customers. MetroPCS and Leap have much smaller subscriber bases with 8.1 million and 5.4 million wireless customers, respectively.
The combination will put pressure on smaller wireless carriers such as Leap and MetroPCS to purchase more spectrums (airwaves that carry signals for phone and wireless-Internet data) for future broadband networks. Further, the removal of T-Mobile as a stand-alone carrier would make deals and contracts more expensive and will be overruled by the two large operators. If the merger is approved, these smaller companies will not be able to outbid bigger competitors in spectrum auctions and business partnerships.
However, according to AT&T, the removal of T-Mobile would reduce competition in the low cost wireless market and would bring in more businesses for smaller companies. The proposed merger is under review by the U.S. senators, and is awaiting approvals from the Federal Communications Commission and the Department of Justice. The transaction is expected to close in the first half of 2012.
We are currently maintaining our long-term Neutral recommendation on AT&T with the Zacks #3 (Hold) Rank.
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