T-Mobile Proves Regulators Were Right on AT&T Bid

T-Mobile continues to make life difficult for AT&T and Verizon Wireless

Alex Dumortier
Alex Dumortier, CFA
Jan 8, 2014 at 7:00PM
Markets

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Better-than-expected additions to private payroll numbers and Federal Open Market Committee minutes that show the Federal Reserve plans to "proceed cautiously" in reducing the pace of its bond purchases -- neither of these were enough to raise the market's temperature today, as stocks ended Wednesday unchanged, with the the S&P 500 off by just two hundredths of a percentage point. The narrower Dow Jones Industrial Average (DJINDICES:^DJI) fell 0.4%.

Within the oligopoly of cellular carriers, T-Mobile (NASDAQ:TMUS) continues to play the iconoclast. Last Friday, AT&T (NYSE:T) announced that it will offer a credit worth up to $450 to get T-Mobile customers to switch carriers, but that move only pre-empted a widely anticipated offer from T-Mobile, which was announced today.

The termination fee-killer
Here are the details of T-Mobile's offer: In an aim to neutralize the termination fee as an obstacle to switching providers, the upstart carrier will offer new customers that incur such a fee from their old provider up to $350 per line and up to $300 in credit to trade in their old phone.

The offer is only available to customers of the top three carriers, AT&T, Sprint (NYSE:T) and Verizon Wireless. The shares of the three "targets" didn't react the same way to the news: AT&T and Verizon (NYSE:VZ) fell 2% and 1.6%, respectively, while Sprint rose 1.1%. (Note, however, that both AT&T and Verizon went ex-dividend on Wednesday, which would explain a significant portion of the price declines.)

Sprint is reported to be preparing a bid for T-Mobile -- perhaps the divergence indicates the market believes a tie-up is possible, or it could simply be that investors believe the two largest carriers stand to lose the most from T-Mobile's action. Naturally, T-Mobile isn't immune to competitive pressure -- last Friday's announcement from AT&T coincided with a 3.3% drop in its stock price.

While T-Mobile's combative approach may reduce aggregate industry profits, it's a boon for consumers (full disclosure: I'm a satisfied T-Mobile customer) and it justifies regulators' decision to quash AT&T's 2011 bid to acquire the company. Does anyone really believe the industry would be as competitive today if T-Mobile had been folded into AT&T? Furthermore, while it chips away at the profits of its larger rivals, T-Mobile is accruing long-term value for its shareholders by creating goodwill with its customers (old and new). If Sprint wants to get its hands on that value, expect T-Mobile to ask for a hefty acquisition premium -- assuming regulators don't step in first.