AT&T/T-Mobile Down But Not Out After DOJ Sues to Block Merger

The FCC has never approved a deal after it was rejected by DOJ, a senior commission official said late Wednesday. “The process is still ongoing,” the official said. “I think our statement was pretty clear that the chairman had serious concerns about competition. … We're not going to do anything to undermine DOJ."

AT&T was caught off guard. Executive met with DOJ officials Tuesday and were scheduled to have a follow-up meeting to answer additional questions, government and industry officials said Wednesday. DOJ’s action came the same morning AT&T said the company planned to bring 5,000 call center jobs back to the U.S. after the deal was completed, putting additional political pressure on the government to approve the deal. AT&T CEO Randall Stephenson said on CNBC Wednesday morning that AT&T and T-Mobile expected the merger to close in Q1. The timing of DOJ’s announcement was also unusual in that it came in the middle of the day, with markets open. AT&T stock fell 3.9 percent.

"We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” said AT&T General Counsel Wayne Watts. “We plan to ask for an expedited [federal court] hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive effects and we intend to vigorously contest this matter in court."

DOJ had already rejected some deals over the last six months because of concerns about taking key players out of already small national markets -- in particular a proposed NYSE/Nasdaq combination and H&R Block’s proposed acquisition of TaxAct. In several cases the government has lost when it sought to reject mergers. Whole Foods successfully challenged the FTC’s rejection of its 2007 purchase of smaller rival Wild Oats, resulting in a settlement that allowed the two companies to combine. In 2004, a federal judge ruled that Oracle’s acquisition of software rival PeopleSoft would not pose a threat to competition in the corporate software market, overruling DOJ opposition. That year a federal judge rejected the FTC’s attempts to block Arch Coal’s acquisition of Triton Coal.

Deutsch Telekom is very disappointed by the DOJ’s action and will join AT&T in defending the deal in court, a DT spokesman said. “We appreciate the DOJ’s willingness to discuss possible remedies to address the competitive concerns.”

Deputy Attorney General James Cole stressed the department’s concerns that with the merger the number of national wireless carriers would shrink from four to three, during the announcement of the court filing.

"Consumers across the country, including those in rural areas and those with lower incomes, have benefitted from competition among the nation’s wireless carriers, particularly from among the four remaining national carriers,” Cole said. Competition between AT&T and T-Mobile is critical to the market, with them competing “head to head” in 97 of the 100 largest cellular markets, he said. “They also compete nationwide to attract businesses and government customers,” he said. “Were the merger to proceed, there would only be three providers with 90 percent of the market and competition … would be diminished.” While leadership of DOJ’s Antitrust Division has changed with the departure of Christine Varney as its chief, “the division will remain steadfast in its mission to vigorously enforce the antitrust laws,” Cole said.

Genachowski said the commission also has strong concerns about AT&T’s buy of T-Mobile. Genachowski for the most part has withheld comment as the commission investigated the deal. “By filing suit today, the Department of Justice has concluded that AT&T’s acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws,” he said. “Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition."

Commissioner Michael Copps shares “the concerns about competition and have numerous other concerns about the public interest effects of the proposed transaction, including consumer choice and innovation,” Copps said. Commissioner Mignon Clyburn, who previously signaled her concerns about the deal, noted in a statement that the FCC investigation was not yet complete.

T-Mobile “was a significant competitor and it was an innovator, and the elimination of it from the marketplace raised serious concerns and we believe violates that law,” said Sharis Pozen, acting chief of the Antitrust Division, in a Q&A with reporters Wednesday morning. DOJ believes competition “drives innovation and keeps consumers’ prices down,” she said. The deal would result in “substantial concentration” in local markets plus “effects on a national basis” because AT&T, T-Mobile, Verizon Wireless and Sprint Nextel are “the big four” carriers in the U.S., she said. DOJ’s decision did not take into account Sprint as a potential alternative buyer of T-Mobile, Pozen said. DOJ believes its decision will “help protect jobs,” since it will avoid redundancies resulting from the companies’ combination, Cole said.

DOJ will work with the parties on a court schedule and present it to the U.S. District Court for the District of Columbia, Pozen said. DOJ doesn’t know whether AT&T and T-Mobile will go to court or drop the deal, she said. DOJ worked on the case “for months” and “it’s been an exhaustive investigation” involving “constant dialogue with the parties,” she said. “We apprised them of our serious concerns, and as any party can do, our door’s open. If they want to resolve those concerns, we can certainly do that. Here we've got a lawsuit, and we're going to proceed in court.” Asked why DOJ made its announcement earlier than expected, Pozen said DOJ “wanted to clear up any uncertainty in the marketplace about this transaction.” DOJ worked “very closely” with the FCC, but Pozen declined to predict what the FCC would decide.

Deal foe Rural Cellular Association President Steve Berry is “gratified” the DOJ opposed the transaction, he said in an interview. “When we went into talk with DOJ I was impressed with the quality of the questions and the depth of their interest,” Berry said. “We spent a couple of hours in there with our whole group, then many of our carriers went in individually as well. They did a pretty thorough job."

Berry warned that the deal could come back since AT&T is challenging the DOJ filing. “It can work,” he said. “They may find a solution to modify their merger request in a way to address some of these issues. … If they're going to challenge, they've got to go into the substantive issues and they may be searching for a pathway or a potential solution where they can come back with a different look.” There has been some speculation that AT&T might promise to keep the T-Mobile brand alive as a value-priced competitor in the national market, Berry said. “I don’t know if this is completely over.”

Vonya McCann, senior vice president of of Sprint Nextel, perhaps the leading opponent of the deal, called DOJ’s action a “decisive victory for consumers, competition and our country.” Another critic said he’s not surprised DOJ acted quickly. “This was a strong case on the merits,” the official said. “AT&T’s major defense was political, not legal. Rather than let AT&T continue to ramp up the political pressure, I think DOJ decided that there was no reason to wait."

Sanford Bernstein analyst Craig Moffett held out little hope the deal can be revived. “AT&T has already indicated that it will ‘vigorously contest’ the DoJ’s decision,” he wrote investors. “But with the DoJ having sued to oppose, and with the FCC now having made public comments supportive of the DoJ, the deal can be considered all but definitively dead."

"We expect that AT&T will fight, rather than merely step down as is more common when DOJ moves to block mergers,” Stifel Nicolaus said. “DOJ does not need to seek a preliminary injunction (which has a higher burden of proof) because the companies cannot close while the case is still pending at the FCC. We would be astonished if the FCC were to approve the deal while litigation is pending before the District Court. This means that the likely next step is a discovery schedule and a trial schedule. The trial schedule depends on the district court’s schedule. If approval is not provided by September 2012, we understand that AT&T is required to make the breakup payment to T-Mobile.” There’s a $3 billion breakup fee, under some circumstances, in the deal.

DOJ repeatedly refers to T-Mobile as an “aggressive competitor” in the department’s suit. Smaller regional carriers “are significantly different” from the “big four,” and “none is as effective a constraint as is T-Mobile on AT&T, Verizon, and Sprint,” the department said. “Unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.” DOJ’s characterization of T-Mobile as a maverick and innovator appeared key to the decision not to let the deal proceed, industry and government officials said.

Also significantly, DOJ dismissed AT&T’s argument that the deal should be looked at purely on a region-by-region basis. “There is no doubt that AT&T and T-Mobile compete against each other on a nationwide basis, make many decisions on a nationwide basis, and that this national competition is conducted in local markets that include the vast majority of the U.S. population,” DOJ said.

Nationally, the acquisition would raise the Herfindahl-Hirschman Index by nearly 700 points, to 3,100 for mobile wireless telecom services, DOJ said. “These numbers substantially exceed the thresholds at which mergers are presumed to be likely to enhance market power.” In the national market for enterprise and government customers, the deal would increase the HHI by 300 points to 3,400, DOJ said.

Even on a local basis, DOJ said the deal would significantly increase concentration in most cellular market areas. In 91 of 97 CMAs, including all 40 of the top U.S. markets, “preliminary market share estimates demonstrate that AT&T’s acquisition of T-Mobile would increase the HHI by more than 200 points,” DOJ said in the suit. “Such an increase is presumed to be likely to enhance market power.” In the other six CMAs, “the increase would be at least 100, an increase that often raises significant competitive concerns,” Justice said. In more than half the CMAs, a combined AT&T/T-Mobile would have 40 percent share of the market. In at least 15, the combined company would have a “greater than 50 percent share,” the department said.

On Capitol Hill, Democratic critics of the AT&T deal jumped to applaud the DOJ decision. Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., who had urged DOJ to block the deal, said its action would “protect consumers in a powerful and growing industry that reaches virtually every American.” Subcommittee member Al Franken, D-Minn., said he’s “glad the Justice Department recognizes that this merger would hurt consumers and I hope that the court will agree and block it from moving forward.” DOJ “has stood up for competition and fairness,” said House Judiciary Committee Ranking Member John Conyers, D-Mich. Rep. Ed Markey, D-Mass., declared “victory for competition, consumers and choice.” Policymakers “should be protecting American consumers holding their cell phones, not just telecommunications titans holding stock in the companies,” he said. DOJ’s decision “reflects my own views of the need for true competition and value to consumers,” said House Communications Subcommittee Ranking Member Anna Eshoo, D-Calif.

The Senate Commerce Committee is still expected to have a hearing this fall on the AT&T/T-Mobile deal. The committee’s Democratic and Republican leaders declined to comment on Wednesday’s DOJ action.

Republicans across Congress kept quiet. Senate Antitrust Subcommittee Ranking Member Mike Lee, R-Utah, and House Judiciary Committee Chairman Lamar Smith, R-Texas, who had seemed open to the deal, declined to comment. House Commerce Committee Chairman Fred Upton, R-Mich., and Communications Subcommittee Chairman Greg Walden, R-Ore., also did not comment. House Internet Subcommittee Chairman Bob Goodlatte, R-Va., didn’t respond to a request.

The DOJ complaint is likely to pressure the FCC to move quickly and “wrap it up sooner than later,” said Public Knowledge Legal Director Harold Feld on a conference call by consumer and public-interest groups Wednesday. It’s likely that the commission would refer the proceeding to the administrative law judge, he said. AT&T is expected to appeal if the ALJ blocks the deal and then the full commission would have to decide whether to affirm or modify the ALJ’s decision, he said.

The FCC would have the same concerns the DOJ has, said Parul Desai, policy counsel at Consumers Union. Any closed-door negotiations between the federal regulators and the merging parties are highly unlikely, said Andrew Schwartzman, senior vice president at the Media Access Project. AT&T’s statement indicated it’s surprised by DOJ’s move, he said. But he said DOJ’s move is not surprising, given the significant antitrust impact of the deal. Schwartzman said it is surprising that Justice moved so quickly.