AT&T Inc plans to pay $39 billion for Deutsche Telekom AG’s T-Mobile USA to create a new U.S. mobile market leader, but the pricey purchase is likely to attract intense antitrust scrutiny over potentially higher customer bills.
The deal gives AT&T, the No. 2 US mobile service often criticized for its poor network performance, additional capacity to expand and meet ever increasing demands for videos and data from devices such as Apple Inc’s iPhone.
For Deutsche Telekom, the deal offloads an asset that was declining in profitability and provides it with funds to pay down debt and buy back shares. The German telecom operator also gets an 8 percent stake in AT&T as part of the deal, becoming its largest shareholder and retaining some exposure to the U.S. market.
The deal leaves smaller rivals like Sprint Nextel scrambling to figure out their next step. Sprint also held talks to merge with T-Mobile, the No. 4 U.S. mobile service.
Sprint complained that the deal would dramatically alter the wireless industry, which it said would be “dominated overwhelmingly” by two companies that have almost 80 percent of U.S. wireless contract customers.
But the world’s largest M&A deal so far this year could run into trouble with U.S. antitrust officials who fear that fewer wireless players could drive up prices for consumers. T-Mobile USA now offers some of the lowest wireless services rates.
The deal will add 34 million customers to AT&T’s current 96 million, giving it a combined market share of an estimated 43 percent from 32 percent, putting it well ahead of Verizon Wireless’ 34.5 percent share.
“It’s just nuts,” said David Balto, an antitrust attorney and a former policy director at the Federal Trade Commission. “When you look at healthy and unhealthy markets, this is at the top of the list of unhealthy markets.”
One analyst pointed out that the two top U.S. operators — a larger AT&T and Verizon Wireless — will account for nearly three out of four mobile subscribers after this deal, which could lead to higher bills.
U.S. Senator Herb Kohl, chairman of the Senate Antitrust, Competition Policy and Consumer Rights Subcommittee, said his panel will take a close look at what a “loss of competition will mean for people who increasingly rely on wireless phone service to connect to friends, family and the Internet.”
“Consumers have borne the brunt of the increasingly concentrated market for mobile phone service,” Kohl said.
The purchase price includes a cash payment of $25 billion with the balance to be paid using AT&T stock. AT&T has the right to pay more cash as part of the purchase price by up to $4.2 billion.
As part of the deal, which was approved by both companies’ boards, a Deutsche Telekom representative will join the AT&T board. AT&T can increase the cash component so long as Deutsche Telekom retains at least a 5 percent equity stake in it.
Deutsche Telekom is expected to use 5 billion euros to buy back shares and 13 billion euros to lower its debt, said another source with direct knowledge of the deal discussions. The source said no other deals are planned in the medium term.
AT&T said that it will finance the cash portion with new debt and cash on AT&T’s balance sheet. AT&T will not assume any T-Mobile USA debt and that the deal would add to earnings, excluding non-cash amortization and integration costs, in the third year after closing.
Representatives from the U.S. Federal Communications Commission and Sprint declined comment as did officials from Verizon Wireless, which is owned by Verizon Communications and Vodafone Group Plc.