When the combination of T-Mobile USA and AT&T was first proposed, there was something of a consensus opinion: this is going to get complicated. Whether for or against the deal, the common factor was that the industry viewed this particular path as hellishly complicated.
While in-country mergers have become increasingly popular as a way for weaker players to bolster their positions and benefit through scale, any transaction involving market leaders is going to draw significant attention from regulators and legal watchdogs. And the sheer scale of the AT&T/T-Mobile USA deal, involving more than 130 million subscribers, made intense scrutiny a certainty.
At the time the deal was first announced, it was suggested that the approvals process could take some 12 months, with the early statements from the two camps seemingly designed specifically to appease the regulators. But news this week that the Department of Justice (DoJ) is looking to block the alliance means that there are significant hurdles to overcome if it is to come to fruition.
The big issue – especially for Deutsche Telekom, parent of T-Mobile USA – is that there is no obvious alternative for the US business moving forward if the AT&T deal falters. It is already struggling, hence DT’s keenness to exit the subsidiary. And a turn-around effort is likely to be both costly and time consuming, at a time when the company’s European businesses also need some nourishment.
One of the preferred ways of appeasing regulators – the disposal of some assets – looks like something of a non-starter in this case. With the DoJ stating that AT&T and T-Mobile overlap in 97 of the top 100 markets, this deal is about gaining strength through consolidation, and not about increasing reach by moving into new markets. Any assets offered for sale are likely to be those unwanted by AT&T moving forward, meaning they are hardly prime properties. Why would the sale of unwanted assets serve to quell regulatory criticism?
Prior to the announcement of the AT&T alliance, Sprint was widely suggested as a merger candidate for T-Mobile, but the same issues are evident now as then. A significant issue is that the companies use incompatible network technologies, which will make integration costly, complex and time consuming – and as Sprint’s handling of the Nextel acquisition has shown, this can cause headaches for years to come.
With Sprint currently in the process of refreshing its CDMA network, phasing out its iDEN equipment, and with a 4G roadmap which already includes WiMAX and LTE (through Clearwire and potentially LightSquared), there is surely little appetite to add T-Mobile’s GSM/HSPA network to the mix.
In addition to which, it was reported earlier this year that Sprint and Deutsche Telekom could not agree on a valuation for T-Mobile USA, making any deal a non-starter. With T-Mobile having several months more of uninspiring results under its belt, Sprint is unlikely to have seen its assement of the company rapidly shooting upward. And with Sprint having well documented operational pressures of its own, the best option seems to be a continued focus on strengthening its core assets, rather than acquiring another struggling mobile operator.
But there is also little doubt that T-Mobile could benefit from additional size. Perhaps the best option would be to look to partnerships with tier-two operators, a strategy which may draw less attention from the regulators. But again, this would achieve the triple-whammy of being costly, time consuming and complex. It would need to do three deals (with MetroPCS, US Cellular and Leap) to match even the size of Sprint, and it is not clear that these companies are in the market for alliances. Taking into account the fact that these operators use CDMA network technology, creating a number of integration issues, this kind of piecemeal approach looks much less appealing.
There is the possibility that an investor from overseas could see T-Mobile USA as a way to create a foothold in the US market, for example with Carlos Slim’s America Movil group able to generate some geographic synergies through its existing presence in the Americas. Telefonica may also feel the same. But a T-Mobile acquisition would still represent a big deal to acquire a struggling operator in a mature market, and with the global economy still barely recovered from the recession – and with uncertainty remaining in a number of markets – investor appetite for big, risky deals is muted at best.
The Financial Times reports a US analyst with one view of the way forward for T-Mobile as an independent company: pile ‘em high and sell ‘em cheap. The company already has an underutilised network, and by cutting its prices it could build its market share and revenue figures – albeit at the cost of its margins. It could also use its spare capacity to build its position connecting emerging devices such as ebook readers, tablets and other consumer electronics products.
At first glance, the most obvious potential casualty for this strategy would be Sprint, which has operations targeting many of the same markets – with AT&T and Verizon Wireless being more squarely focused on the premium market. While Sprint has been the most vocal opponent of the AT&T/T-Mobile USA tieup, arguably it has the most to lose should T-Mobile be forced to come out fighting…
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members