AT&T and T-Mobile merger doubts deepen

AT&T’s proposed $39bn takeover of Deutsche Telekom’s T-Mobile USA may have been dealt a knockout blow by the decision of the Federal Communications Commission’s chairman to seek an administrative review of the deal, some analysts suggested on Wednesday. The announcement of the planned review triggered a war of words between AT&T and FCC officials, highlighting the animosity between the two sides against the backdrop of a growing level of distrust between the government and US business. “Ever since the Department of Justice filed in August to block AT&T’s deal to acquire T-Mobile, the deal was on life support,” said Craig Moffett of Bernstein Research in a note to investors. “Yesterday, the FCC disconnected the respirator.” Mr Moffett, who had previously put the odds of the deal being completed at about 10 per cent, added: “We believe that it is now time for AT&T to concede defeat and withdraw the merger.” Christopher King and David Kaut of Stifel Nicolaus said the unusual move to subject the proposed transaction to further review “makes it even more unlikely the merger will close – including through a settlement – and puts particular pressure on T-Mobile to take a fresh look at its risks and choices”. Administrative reviews of such deals are highly unusual. The decision by FCC chairman Justin Genachowski to ask his three fellow commissioners to vote for such a move is widely seen as signalling a high level of opposition. FCC officials contend the deal is not in the public interest and would reduce competition. The last time the agency sought an administrative review was in 2002 on the proposed merger of EchoStar and DirectTV – a deal that the companies eventually abandoned before it went to court. In a conference call with reporters, FCC officials said the agency had concluded that the proposed deal would significantly diminish competition and result in an unprecedented concentration in the wireless industry in 99 out of the top 100 markets. They also dismissed AT&T’s arguments that the transaction would enable the company to expand its rollout of a new 4G wireless broadband network based on a technology called LTE services, or that it would create any new jobs in the US. Officials said the deal would probably result in significant job losses. In an unusually forthright public comment, a senior FCC official said: “The record clearly shows that – in no uncertain terms – this merger would result in a massive loss of US jobs and investment.” That statement came after AT&T had earlier described the FCC chairman’s action as disappointing. AT&T said it was “yet another example of a government agency acting to prevent billions in new investment and the creation of many thousands of new jobs at a time when the US economy desperately needs both”. The company added: “At this time, we are reviewing all options.” Jim Cicconi, AT&T senior executive vice-president of external and legislative affairs, later took further issue with the commission. “The FCC itself recently claimed that their $4.5bn broadband universal service fund will create 500,000 jobs over the next six years,” he said. “Yet, somehow in our merger, the FCC staff concluded that a far greater investment in broadband – $8bn – plus firm commitments on job preservation and enhancement, will instead result in ‘massive loss of US jobs and investment’. This notion, that when government spends money on broadband it creates jobs but when a private company spends money it doesn’t, is clearly wrong on its face and raises questions about the credibility of anyone at the FCC who would make such a claim.” The strident tone of the comments made by both AT&T and FCC officials surprised some analysts. They noted that, while neither AT&T nor T-Mobile USA appear ready to concede defeat, there are also genuine political costs of pursuing the case to the bitter end. “After all, AT&T will have to do business with the DoJ and the FCC in the future,” said Mr Moffett. On a related matter, the FCC officials said they would circulate a draft order that would approve, with conditions, AT&T’s purchase of valuable spectrum from Qualcomm, the US-based mobile phone chipmaker.