) 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 (
) might look to acquire T-Mobile. Sprint's shares were down 14% on
this news. AT&T's move pits it firmly against Verizon (
) as both operators continue to build out their 4G networks.
Our price estimate for AT&T's stock stands at
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
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.
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
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.