If you have been paying any attention at all to AT&T (NYSE: T) lately, then you know its proposed merger with T-Mobile is becoming more and more like a square peg being shoved into a round hole. No matter how much grease the company puts on that peg, and no matter how hard it pushes, it's not moving.
Nothing has made that more apparent than the redacted study of AT&T's proposal that the Federal Communications Commission released to the world yesterday. In a nutshell, it says that whatever the company is selling, the FCC is not buying.
Since the $39 billion deal between AT&T and Deutsche Telekom was signed last March, AT&T has claimed a number of benefits that the merger would bestow on the U.S. What the authors of the FCC report think of those claims can be summed up by this introductory statement: "The Applicants have failed to meet their burden of demonstrating that the competitive harms that would result from the proposed transaction are outweighed by the claimed benefits."
In essence, the report continues, AT&T and Deutsche Telekom have failed "to show that the proposed transaction is in the public interest." And it spells out why:
- "The proposed transaction raises significant competitive concerns in the mobile wireless markets due to the increased likelihood of unilateral and coordinated effects."
- "The record raises substantial and material questions of fact relating to the competitive effects the proposed transaction would have in the markets for roaming, wholesale and resale services, backhaul, and handsets/devices."
- "The economic model on which the Applicants base their claim that the proposed transaction would result in lower wireless industry prices is flawed ... [the model] makes overly simplistic assumptions about the structure and conduct of the wireless industry."
- "The engineering model on which the Applicants base their claim of reduced network costs ... is also flawed."
- "The Applicants have not demonstrated that most of the other cost synergies ... are likely to get passed on to consumers ... [and, if realized,] some of these cost savings would likely result in reduced service quality."
- "We cannot find that the transaction would lead to a net increase in U.S.-based jobs."
Read that last one again, the one about jobs. Wasn't that a major benefit cited by AT&T in full-page newspaper ads, that the merger would create 96,000 new jobs, and bring back jobs from overseas?
Company reaction
AT&T's senior executive vice president of external and legislative affairs, Jim Cicconi, released a statement that included: "It is simply a staff draft that raises questions of fact that were to be addressed in an administrative hearing, a hearing which will not now take place. It has no force or effect under law, which raises questions as to why the FCC would choose to release it."
AT&T's wishful dealing
The FCC's action comes at a very bad time for AT&T. Even before the report came out, the company reacted to FCC chairman Julius Genachowski's announcement that the proposal should have an administrative hearing by withdrawing its application. AT&T did not want to fight a second court battle while it tries to settle the antitrust lawsuit brought by the Department of Justice.
To make the merger more palatable to the DOJ, the company has been trying to make deals with other wireless carriers to take some of T-Mobile's assets. According to The New York Times, AT&T has been quietly trying to sell a large number of T-Mobile's subscribers and some of its wireless spectrum to Leap Wireless (Nasdaq: LEAP). Such a deal would grow Leap into the country's fourth-largest wireless carrier, taking over T-Mobile's present spot, and moving Leap ahead of its second-tier wireless rival, MetroPCS (NYSE: PCS).
Fear and liking
Interestingly, Verizon (NYSE: VZ) and Sprint Nextel (NYSE: S) have had two totally different reactions to the merger proposal. Sprint, as a distant third in the U.S. wireless carrier race, has an understandable fear of the duopoly such a deal would create: AT&T and Verizon together would have approximately 230 million subscribers, close to 80% of the post-paid wireless customers. In light of that, Sprint is suing, along with the DOJ, to stop the deal.
On the other hand, Verizon CEO Dan Mead's reaction to the merger at the time it was announced: "I'm not concerned about it." And lately, it seems, the company is content to keep watching AT&T try to work itself out of its predicament.
Who wins? Not the shareholders
If there are any winners here -- besides the lawyers, investment bankers, and consultants who all (for a nice sum) helped fashion this square peg of a deal -- it would have to be Deutsche Telekom and T-Mobile. When the merger was being worked out back in March, AT&T agreed to a deal sweetener it probably wishes it hadn't -- a fee for Deutsche Telekom estimated to be worth around $4 billion if the proposal falls through.
Tellingly, before the FCC report even came out, AT&T had already announced that it would take a $4 billion charge in its fourth-quarter earnings to account for that fee. Maybe even AT&T is seeing that it and T-Mobile just won't fit.
While our wireless world is getting all shook up, check out these "3 Hidden Winners of the iPhone, iPad, and Android Revolution," and get ready for the smartphone and tablet boom.
