If the AT&T Merger Is Doomed, What Then?

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The Department of Justice's lawsuit last month to halt AT&T's (NYSE: T  ) $39 billion acquisition of T-Mobile has given Sprint Nextel (NYSE: S  ) some hope in its fight to stay alive. So Sprint has started throwing its own legal weight around and also sued AT&T to stop the deal.

Sprint's lawsuit echoes the fear that the proposed deal would create a duopoly whereby AT&T and Verizon (NYSE: VZ  ) would control 90% of the wireless market's profit. Indeed, it would thrust AT&T into the lead in numbers of subscribers, ahead of archrival Verizon.

Clawing its way back up
Of the four major national carriers, in terms of subscribers, Sprint is a distant third just ahead of T-Mobile. If T-Mobile were swallowed by AT&T, that would leave Sprint hard-pressed to continue its attempts to return to profitability from an even more distant position. In its fight to survive, it has been aggressively offering better pricing deals than the competition, and it has had more liberal handset-replacement policies.

This has worked -- to a degree. Sprint has seen accelerating growth in its postpaid subscriber rolls but is still losing net customers, though at a slower pace. On the other hand, its pricing and handset policies have contributed to lower margins -- not a good sign.

A lose-lose situation
If the DOJ prevails and the merger is stopped, there are termination fees AT&T must pay to Deutsche Telecom, the German owner of T-Mobile. Those amount to $3 billion in cash and another $3 billion worth of its wireless spectrum and roaming agreements given to T-Mobile. This would certainly help out T-Mobile, which has been losing subscribers since the merger proposal was made. Apparently those were customers who didn't want to move to AT&T.

But there are two outs for AT&T: If the deal is not approved within a certain time period, it may not have to pay the termination fee. That also may apply if T-Mobile's value falls below a predetermined level. Obviously, the more subscribers T-Mobile loses, the lower its value.

It ain't over till it's over
In the meantime, Sprint has some things it must do to really get back in the game. For one, it will have to clarify what it's going to do about its 4G dilemma. It currently owns 53% of WiMaX network provider Clearwire (Nasdaq: CLWR  ) , but that technology is not on par with the networks of AT&T and Verizon.

To remedy that, Sprint agreed to a 15-year agreement with LightSquared's LTE network. But because nothing is ever simple in telecom, LightSquared is embroiled in a controversy with the Federal Communications Commission, which is concerned that its network could affect GPS systems.

Next, Sprint has to continue phasing out its legacy Nextel network. It has had problems integrating the two standards since the acquisition of Nextel back in 2005. Only 15% of Sprint's customers now use Nextel, down from 25% two years ago.

But it seems to always come down to Apple's (Nasdaq: AAPL  ) iPhone. The Wall Street Journal reported that Sprint will be getting the iPhone 5 in October. If true, this could be a life preserver for the company, especially if it bucks the current AT&T and Verizon practice of limiting data usage .

Take this away … or don't
Things are really up in the air in telecom-land. The AT&T–T-Mobile merger may or may not happen. AT&T may or may not have to pay termination fees if the merger doesn't go through. Sprint may or may not keep using ClearWire's 4G network. LightSquared may or may not get clearance to use its spectrum.

And Sprint may or may not be able to say it is getting the iPhone at its "Strategy Update" event on Oct. 7. But if it can make that announcement -- and clarify its 4G situation -- and if a stake is driven into the heart of the AT&T merger, well then, it may not be so naive to talk about a real Sprint comeback.

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Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of AT&T and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2011, at 8:37 PM, Aryabod wrote:

    Owing to limited spectrum, I see Falcone's Lightsquared getting the nod from the FCC. Current technology should rectify the 'interference' issues in Falcone's favor and we should expect to soon see a remedying of these concerns.

    Nevertheless, I still see Sprint straddling the fence with Clearwire and L2 only because it makes good business sense in a world of limited spectrum and geometric growth demands in data.

    In addition to the aforementioned Sprint's line up of smartphones is second to none even without an iPhone, however I am 95% certain that Sprint will launch its iPhone next month. It has gone from being a rumor to a fait accompli.

    The iPhone will essentially be the final icing on their armor. This should put a complete halt on their Post Paid churn.

    Assuming the aforementioned all fall in place Sprint should have no problem navigating its ship into open waters away from any immediate troubles.

    As we know the company has already embarked on its Network Vision, overhauling its networks. This should save the company close to $2 billion annually once it is consummated.

    Everything seems to be falling in place for Sprint.

  • Report this Comment On September 13, 2011, at 10:39 PM, jopow wrote:

    It should be noted that Verizon and AT&T are really the re-formation of the AT&T Bells from years ago.

    If you look over the origins behind the two companies, they combined many of the regional Bells.

    We are in effect back to the situation that prevailed in the 1970s, where it was 6 years of litigation by the DOJ and AT&T agreed to break up. Now, in effect, they came back to form two companies.

    Sprint on the other hand, is just greatly troubled by ongoing losses and a complex national network. Sprint needs billions of dollars, as cheap as it can get, to modernize and develop a full national 4G network. That is a long time to get done, even with all the money in the world.

    However, the nation really needs to stop a duopoly and needs a national #3 carrier.

    Sprint really needs some big time investors to come in and help them to compete and grow into a stronger number 3 that ultimately makes a profit.

    I am greatly troubled by the very high charges that AT&T and Verizon get away with given their dominance and power to control the markets. T-mobile threw in the towel, and now we have to hope that Sprint does not throw in the towel given the difficult competitive environment.

  • Report this Comment On September 13, 2011, at 10:41 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer.

    Taking into account the whole U.S. market, a combination of AT&T and T-Mobile would increase the Herfindahl-Hirschman Index (HHI), an widely accepted measure of market concentration, to 3,216 from 2,848, according to a Bloomberg analysis. Any score above 2,500 indicates a highly concentrated market, and any increase of more than 200 points clearly enhances market power, according to federal guidelines.

    If this ridiculous deal goes through, Sprint will be the only low-priced post-paid national wireless carrier left in the United States. T-Mobile customers are already fleeing to Sprint because they know they won’t get low prices from AT&T or Verizon. But AT&T and Verizon are two of the top corporate lobbyists in the country, so beware of how things could “mysteriously” turn in this case.

  • Report this Comment On September 13, 2011, at 10:41 PM, conradsands wrote:

    Sprint Customer Satisfaction #1

    Sprint Nextel has been recognized as a J.D. Power 2011 Customer Service Champion — one of only 40 companies to have earned this distinction this year. To qualify for inclusion on this elite list, the companies must not only excel within their own industry, but also stand out among leading brands in 12 major industries evaluated by J.D. Power and Associates.

    Sprint also tied for the number one spot among major wireless carriers for customer satisfaction, according to results from the 2011 American Customer Satisfaction Index. The ACSI survey also shows that Sprint is the number one most improved company in customer satisfaction, across all industries, over the last three years.

    With ACSI scores that continue to trend up since 2008, Sprint is the only major carrier continuing to make improvements in overall customer satisfaction. The ACSI survey also finds Sprint, for the first time, reaching the top spot among major carriers in customer value since ACSI started measuring wireless carriers seven years ago.

  • Report this Comment On September 13, 2011, at 10:41 PM, conradsands wrote:

    AT&T’s Dirty Money at Work …

    Snippets from CNN story …

    AT&T lobbyists push for T-Mobile deal

    For years, AT&T has been one of the biggest political and lobbying forces in Washington, D.C. Last year, it spent $15.3 million and had 93 lobbyists on its roster, including six former lawmakers. Germany's Deutsche Telekom spent $3 million on lobbying for T-Mobile USA in 2010, armed with 41 lobbyists and one former lawmaker.

    Many lawmakers have a personal interest in seeing AT&T do well. AT&T ranked as the sixth most popular investment among members of the House and Senate in 2009, the most recent year for which such data is available, according to the Center for Responsive Politics.

    And AT&T is considered a heavy hitter during campaign election cycles. In 2010, donors with links to the company made nearly $4 million in campaign contributions to candidates running for federal office.

  • Report this Comment On September 13, 2011, at 10:42 PM, conradsands wrote:

    About the proposed AT&T/T-Mobile tie-up ...

    “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.”

  • Report this Comment On September 13, 2011, at 11:01 PM, Cogillo wrote:

    How long before Sprint is bought over by Google, Apple, or Microsoft ?...The logical extension of the Apple / Google battle is to lock up the user experience over the air, control bandwidth, subscription rates, advertizing opportunities and ease of use. To be fully vertically integrated the carrier is the last piece of the puzzle...and what a prize sprint's network would be at current price...much cheaper than trying to build out your own network !!!

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