It may take a breakup to prop up T-Mobile USA Inc.
The telecom company could come away with billions of dollars in cash and services if an acquisition bid from rival AT&T Inc. falls through; that’s a real possibility after the Justice Department on Wednesday moved to block the deal on antitrust grounds.
If the $39-billion deal disintegrates, AT&T would have to pay more than $3 billion in cash to T-Mobile’s German parent, Deutsche Telekom, along with airwaves and a roaming agreement worth billions more.
The situation is ironic: AT&T’s attempt to become the largest wireless carrier in the U.S. could ultimately help strengthen its rival. T-Mobile, the nation’s fourth-largest carrier, is known as a scrappy, price-oriented telecom player. A major payout could turn it into a much larger threat.
“It would put T-Mobile on better competitive footing,” said Steve Clement, senior research analyst with Pacific Crest. “T-Mobile’s stand-alone basis would strengthen and AT&T’s options would weaken.”
The breakup fee is one of the largest in recent memory, experts said. Google Inc., which earlier this month said it would buy Motorola Mobility Holdings for $12.5 billion, offered a $2.5-billion breakup fee. That’s 20% of the deal value, compared to not quite 8% for AT&T for the cash portion of the payout.
The termination requirements are designed to protect Deutsche Telekom and T-Mobile in a particularly precarious deal, said Robert Bell, co-chairman of law firm Kaye Scholer’s antitrust practice group. Waiting for the controversial proposal to go through could leave T-Mobile vulnerable as key employees consider leaving and competitors circle, Bell said.
“Agreeing to this fee was part of the price AT&T had to pay to convince T-Mobile to go forward, to take a calculated risk in this transaction” he said. “Typically, the longer it takes to get to closing, the more problematic it can be for the seller. You’re really putting your company in limbo.”
T-Mobile has been struggling since Deutsche Telekom said it was unwilling to invest further in the company. It didn’t start building out its wireless network until years after its competitors solidified theirs. But a pile of breakup cash could help patch the holes and help build out the company’s next-generation 4G system.
AT&T will also have to hand over airwaves — or “spectrum” — which could improve T-Mobile’s bandwidth capacity. A stipulation that AT&T must aid Deutsche Telekom in setting up more roaming could broaden T-Mobile’s footprint coverage.
The huge stakes ensure that AT&T won’t want to leave T-Mobile at the altar, Clement said. AT&T’s general counsel on Wednesday said the firm plans to “vigorously” battle the government in court.
“It makes AT&T a lot more willing to fight,” Clement said. “There’s so much they’d have to give up if it doesn’t go through.”