Global Settlement on AT&T/T-Mobile Seen as Best Hope for Keeping Deal Alive

AT&T would have to pay a significant breakup fee to Deutsche Telekom under the agreement both companies announced in March if the deal craters -- $3 billion, plus AWS spectrum and roaming rights worth another $3 billion. FCC Chairman Julius Genachowski only circulated a draft order sending the case to an ALJ; it still must be approved by a majority of commissioners. But given the staff’s conclusions as reported Tuesday and the Democratic majority of the commission, FCC sources said they expect the order to be approved.

The last time the FCC ordered an ALJ hearing on a merger was 2002, when the FCC took that step on EchoStar’s proposed buy of DirecTV, said Andrew Lipman with Bingham McCutchen. That deal subsequently fell apart. “I've been practicing for 35 years and I can’t recall a telecom matter that’s gone to an ALJ,” he said. Lipman said if AT&T can reach an agreement it would likely be a “global settlement” with both DOJ and the FCC. “There’s always a possibility,” but “reaching a settlement will be challenging,” he said.

Merger opponents told us Wednesday they believe the deal is effectively dead. AT&T also faces a trial expected to last more than a month in the U.S. District Court before Judge Ellen Huvelle. The ALJ hearing would add still more time to the process and would be unlikely to even get started before April or May, after Huvelle reaches her decision. The deal, as proposed, is required by the agreement signed by the two carriers to be completed in September 2012.

"Some folks at AT&T may still be in denial, but the deal is dead,” said merger opponent Andrew Schwartzman, senior vice president of the Media Access Project. “I don’t see any scenario that works for AT&T. If there were ever any chance of settling with DOJ before trial, which I never believed, it is never going to happen now. Even if Judge Huvelle rules against DOJ, it is facing a trial with Sprint and C-Spire as well as an FCC trial and a lengthy appellate process.” Keeping the deal alive could help AT&T negotiate a lower breakup fee with T-Mobile, Schwartzman said. “T-Mobile would be paralyzed for 10 more months, so I would imagine it is in T-Mobile’s interest to negotiate a settlement,” he said.

"I do not think the ATT/T-Mobile Humpty Dumpty can or will be put back together as proposed -- another structure -- supporting competition in the market place -- may be the only practical solution for ATT,” said Steve Berry, president of the Rural Cellular Association. “It is clear that DOJ and FCC are very concerned about encouraging a competitive wireless industry and not eliminating a major nationwide carrier. I could only hope that reality translates into policy decisions to help smaller competitive carriers compete -- such as support for 4G data roaming, interoperability, device availability and spectrum policy that maximizes use of existing spectrum for high speed mobile broadband use."

The smart move for both companies is to renegotiate the breakup fee, said Public Knowledge Legal Director Harold Feld. “I think that a settlement has been effectively made impossible since DOJ filed its complaint,” Feld said. “What this does is simply confirm for those who have been in denial that this deal is simply not going to get approval. This puts tremendous pressure on [T-Mobile USA owner Deutsche Telekom] DT to renegotiate the break up fee so they can get out of the deal before next September. T-Mobile is still worth $28 billion in an IPO, and still has several other possible suitors."

UBS said the proposed FCC order is “another setback” for AT&T. “We believe AT&T continues to work on a settlement package that would alleviate DOJ’s concerns and is still committed to the deal, at this point,” UBS said. “Were AT&T to pull its application, we would expect the company to work with [Deutsche Telekom] to find a new way for the companies to cooperate."

Sending the case to an ALJ doesn’t mean AT&T can’t win, said Paul Gallant, analyst at Guggenheim Partners. But Gallant believes DOJ is more likely than AT&T to prevail in an eventual trial. “Should AT&T prevail over DOJ in court, we believe the FCC would approve the merger as well despite having initiated the merger rejection process,” he said. “We say this because the FCC and DOJ analysis of telecom mergers is so similar: both agencies’ principal inquiry is the merger’s impact on competition. While a ruling by Judge Huvelle in favor of AT&T would not be binding on the FCC, it would raise difficult questions about the FCC’s own competition analysis of the same merger."

AT&T appears more likely to win in a trial than reach a settlement with DOJ, said analyst Jeff Silva of Medley Global Advisors in a Wednesday report. The deal could still go through, but faces a steeper uphill climb with the FCC order, Silva said. “Though perhaps not obvious to the casual observer, a fundamental and eminently meaningful shift in merger dynamics has occurred now that AT&T/T-Mobile is now before a federal judge and is likely to come under the purview of an FCC administrative law judge,” he wrote. “Both changes in venue tend to significantly insulate the U.S. government’s consideration of AT&T/T-Mobile from the kind of potent political and lobbying activity that for months enabled AT&T to drive the narrative that US approval was inevitable and win converts in the process. AT&T/T-Mobile has now become a lawyers’ game."

Stifel Nicolaus also isn’t counting AT&T out at this point. “AT&T and T-Mobile could continue to fight the DOJ antitrust opposition in court, with the hope that if they win a favorable ruling from U.S. District Court Judge Huvelle early next year … they could then work out a settlement with the government agencies to head off a DOJ appeal and FCC hearing review,” the firm said in a report.

The Communications Workers of America called the FCC chairman’s action “a job killer at a time of 9 percent unemployment.” The only Hill reaction so far was from Reps. Ed Markey, D-Mass. and Jay Inslee, D-Wash., who both welcomed the development.

AT&T Senior Executive Vice President Jim Cicconi questioned whether sending the matter to an ALJ makes sense given the FCC’s push to make broadband more readily available in the U.S. The FCC recently claimed that rededicating the Universal Service Fund to pay for broadband will create 500,000 jobs over six years, he said. “Yet somehow in our merger, the FCC staff concluded that a far greater investment in broadband -- $8 billion -- plus firm commitments on job preservation and enhancement, will instead result in ‘massive loss of U.S. jobs and investment,'” Cicconi said. “This notion, that when government spends money on broadband it creates jobs, but when a private company spends money it doesn’t, is clearly wrong on its face, and raises questions about the credibility of anyone at the FCC who would make such a claim.”