The Department of Justice (DoJ) has filed a antitrust lawsuit to block AT&T Inc.‘s (T) ambitious $39 billion purchase of Deutsche Telekom’s unit, T-Mobile USA, announced in March. The proposed AT&T and T-Mobile merger is the largest in the wireless industry since 2004.
According to the DoJ, 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). In addition, the deal, which is still under review by the Federal Communications Commission, will mellow down innovation and investments in the industry and eventually affect customers.
Further, the merger would lead to higher prices and stifle 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. The combined company would be almost three times the size of Sprint Nextel Corp. (S), which is currently the third-largest U.S. wireless carrier in the industry.
At the end of the second quarter, AT&T and T-Mobile had a respective of 98.8 million and 33.6 million wireless customers while Verizon and Sprint had 106.3 million and 52 million subscribers, respectively.
The DoJ move is similar to the disapproval by Sprint, which was the first to raise a voice of protest. Subsequently, MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) also joined the league of opposition. MetroPCS and Leap are the prepaid wireless service providers in the U.S.
According to these carriers, the combination will put further pressure on smaller wireless carriers to purchase more spectrums (airwaves that carry signals for phone and wireless-Internet data) for future broadband networks.
Additionally, 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.
AT&T might have to pay a breakup fee of $3 billion in addition to some license fees to the German company, in case the deal fails. Nevertheless, AT&T is trying to infuse new life to the blocked deal. The company is arguing that the proposed merger would bring improved wireless services through combined network and development costs.
Post merger, AT&T would expand its 4G out Long-Term Evolution technology to almost 97% of the U.S. population. This implies that 55 million more Americans, mostly in rural and smaller communities, will come under its coverage. Additionally, the deal will aid in acquiring more radio spectrums.
We are currently maintaining our long-term Neutral recommendation on AT&T. The company retains the Zacks # 3 Rank (Hold) for the short term.
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