AT&T Scraps T-Mobile Merger - Analyst Blog

After many twists and turns, the AT&T Inc. ( T ) and T-Mobile merger story finally reached in its last chapter, but with an unsuccessful ending. Following a nine-month fight to win approvals, the second largest U.S. wireless service provider dropped its $39 billion bid to purchase T-Mobile USA.

The move came a few weeks after AT&T withdrew its application from the Department of Justice (DoJ) following heavy regulatory attacks. The DoJ in August and the Federal Communications Commission in November blocked the proposed takeover citing concerns relating to unfair competition, layoffs, higher prices, lower innovation and investments in the industry. According to the regulators, the combination would have created a duopoly market for the U.S. wireless industry, giving AT&T and Verizon Communications Inc. ( VZ ) almost 80% control over the U.S. wireless post-paid market.

In fact, even the third-largest U.S. wireless carrier Sprint Nextel Corp. ( S ) had opposed to this merger. This was an obvious reaction as the combined company would be almost three times that of Sprint and consequently hurt its profitability. The failed deal comes as a respite for its turning post-paid wireless business.

Furthermore, the effects of the merger on smaller and lower-cost wireless carriers like MetroPCS Communications Inc. ( PCS ), United States Cellular Corporation ( USM ) and Leap Wireless International Inc. ( LEAP ) was unclear. While the combination would have put pressure on these carriers to purchase more spectrums for future broadband networks, it would have also made deals and contracts more expensive and therefore impossible for the smaller players to outbid bigger competitors in spectrum auctions and business partnerships.

With the termination of the deal, AT&T's hopes of becoming the largest U.S. wireless carrier, dethroning Verizon are shattered. The company was in need for additional airwaves to expand its advanced high-speed 4G services given its exponential growth in mobile broadband traffic. Already criticized for dropped calls and poor network coverage, AT&T will face more constraints in its capacity deployment than Verizon, no doubt hurting subscriber growth. Moreover, AT&T might lower its profit forecast for the next year as it had already assumed merger-related benefits and spending.

The collapse is no less a loss for T-Mobile. The fourth wireless operator will again have to struggle to deploy high-speed services in an intensely competitive environment. Since T-Mobile does not have substantial spectrum to deploy its 4G services and is continuously losing money, its parent company Deutsche Telekom is seeking another buyer.

AT&T agreed to pay T-Mobile $3 billion in cash and $1 billion for spectrum access for dropping the deal. As a result, the company will take a $4 billion charge in the fourth quarter against its takeover. AT&T and T-Mobile nevertheless has entered into the roaming agreement to sell each other's product and services.

Announced in March, this was the largest takeover plan in the wireless industry since 2004.

We prefer to maintain our long-term Neutral recommendation on AT&T. The company retains the Zacks #3 (Hold) Rank for the short term (1-3 months).

LEAP WIRELESS ( LEAP ): Free Stock Analysis Report

METROPCS COMMUN ( PCS ): Free Stock Analysis Report

SPRINT NEXTEL ( S ): Free Stock Analysis Report

AT&T INC ( T ): Free Stock Analysis Report

US CELLULAR ( USM ): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

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

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

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