In a surprise move, AT&T yesterday announced plans to acquire rival US mobile operator T-Mobile in a cash-and-stock deal valued at US$39 billion. The move ends months of speculation over the future of Deutsche Telekom’s US mobile arm, which has long been linked to a deal with Sprint Nextel. 

Deutsche Telekom (DT) Chairman and CEO René Obermann noted in a statement: “After evaluating strategic options for T-Mobile USA, I am confident that AT&T is the best partner for our customers, shareholders and the mobile broadband ecosystem. Our common [GSM/HSPA-based] network technology makes this a logical combination and provides an efficient path to gaining the spectrum and network assets needed to provide T-Mobile customers with 4G LTE and the best devices. Also, the transaction returns significant value to Deutsche Telekom shareholders and allows us to retain exposure to the US market.” 

With this deal, AT&T has committed to expand its future LTE network to cover 95 percent of the US population (294 million people, reaching an additional 46.5 million Americans beyond current plans – including rural communities and small towns).  A statement from both operators notes that T-Mobile USA “does not have a clear path to delivering LTE.”

AT&T is currently the second-largest mobile operator in the US, with T-Mobile being the number four. According to Wireless Intelligence, the deal will make AT&T far and away the number one player, with around 130 million connections and around a 42 percent market share (ahead of market leader Verizon Wireless’ 33 percent share today). Given AT&T’s likely future dominance, the deal will face close regulatory scrutiny from both the US Department of Justice and the Federal Communications Commission. If successful, AT&T and T-Mobile hope to close the deal in around 12 months from now.

“This transaction delivers significant customer, shareowner and public benefits that are available at this level only from the combination of these two companies with complementary network technologies, spectrum positions and operations,” commented Randall Stephenson, AT&T Chairman and CEO. “We are confident in our ability to execute a seamless integration, and with additional spectrum and network capabilities, we can better meet our customers’ current demands, build for the future and help achieve the President’s goals for a high-speed, wirelessly connected America.” 

As part of the transaction, DT will receive an equity stake in AT&T that, based on the terms of the agreement, will give DT an ownership interest in AT&T of approximately 8 percent (making DT the biggest minority shareholder in the largest US mobile operator). A DT representative will join the AT&T Board of Directors. The mega deal has already been approved by the Boards of Directors of both companies.

Both operators used their joint statement today to outline their justification for the deal and appease regulatory concerns, trumpeting “spectrum and network efficiencies,” “improved service quality,” expansion of LTE coverage, and an increase in AT&T’s infrastructure investment in the US by more than US$8 billion over seven years. AT&T said it expects to create “substantial value for shareholders through large, straightforward synergies with a run rate of more than US$3 billion, three years after closing onward (excluding integration costs).” AT&T added that the value of the synergies is expected to exceed the purchase price of US$39 billion.

It was stressed that “post-closing, AT&T intends to tap into the significant knowledge and expertise held by employees of both AT&T and T-Mobile USA to succeed,” and that “the combined company will continue to have a strong employee and operations base in the Seattle area.” There was no word on any possible job losses.

The US$39 billion purchase price will include a cash payment of US$25 billion with the balance to be paid using AT&T common stock, subject to adjustment. The transaction is expected to be earnings (excluding non-cash amortisation and integration costs) accretive in the third year after closing. Pro-forma for 2010, the transaction increases AT&T’s total wireless revenues from US$58.5 billion to nearly US$80 billion, and increases the percentage of AT&T’s total revenues from wireless, wireline data and managed services to approximately 80 percent. AT&T stressed that it will assume no debt from T-Mobile USA, while DT plans to use approximately EUR13 billion of the proceeds to reduce its own debt.

AT&T’s huge move will dominate talk at this week’s CTIA event in Orlando, Florida, where Mobile Business Briefing is reporting live. Stay tuned for more details, especially following Tuesday morning’s operator keynote session.