The Race for 4G: AT&T Buys T-Mobile


AT&T ( T ) announced its proposed acquisition of T-Mobile in a cash and stock offer valued at roughly $39 billion. This is a significant announcement given the size of the two companies and since there was speculation that Sprint ( S ) might look to acquire T-Mobile. Sprint's shares were down 14% on this news. AT&T's move pits it firmly against Verizon ( VZ ) as both operators continue to build out their 4G networks. Our price estimate for AT&T's stock stands at $35.80 which is around 40% ahead of the market price.

Our Quick Take …. Problems, But Potential

If we compare AT&T and T-Mobile's voice and data coverage charts, it looks like there are no material additions to AT&T's coverage. In other words, T-Mobile's presence is not significant in any places where AT&T is not. Additionally, T-Mobile's customers have lower ARPU (average revenue per user) of $52 compared to AT&T's overall average ARPU of $62.57. T-Mobile also has higher churn and lower wireless profit margins around 29% compared to AT&T's 41% and churn stood at 3.4% compared to AT&T's 1.3%.

So why did AT&T then buy T-Mobile?

It's All About Spectrum

As the company mentions, its all about spectrum and the race for 4G. AT&T and T-Mobile have similar GSM network with HSPA+ deployed making it easier to integrate, but the treasure lies in the additional spectrum that AT&T gets which will enable to company to extend LTE to more customers than it had originally planned. The spectrum holdings per subscriber (Mhz per million subs) for AT&T stood at 0.86, the least among the major U.S. wireless carriers.

The company thinks that this is not enough to handle future traffic, and T-Mobile's spectrum holdings offer a solution for the company. AT&T expects to gain synergies and move forward in the race for LTE deployment. This could well turn out to be a good move for the company as Verizon is ahead in terms of LTE deployment right now. With this boost, AT&T could have better LTE coverage to even the race.

In the short-term, the acquisition will help expand AT&T's market share by a significant amount, but it will also put pressure on data ARPU and margins. However as the race for LTE intensifies, this broader deployment could be the kick AT&T needed.

You can see the complete $35.80 Trefis price estimate for AT&T's stock here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: S , T , VZ



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