AT&T, T-Mobile Both Likely to Pursue More Spectrum

AT&T filed at the SEC a communication from AT&T CEO Randall Stephenson to DT CEO René Obermann agreeing to wire DT the breakup fee within three business days. DOJ declared victory. “Consumers won,” said Acting Assistant Attorney Sharis Pozen. “Had AT&T acquired T-Mobile, consumers in the wireless marketplace would have faced higher prices and reduced innovation.” Main Justice, which reports on insider news at DOJ, saw the withdrawal as a big win for Pozen and Deputy Attorney General James Cole, who ultimately made the decision to file a case against AT&T.

For AT&T, finding more spectrum emerges as the biggest issue, observers agreed. Verizon Wireless has only gotten stronger in recent months, potentially gobbling up more spectrum with buys of AWS licenses from SpectrumCo and Cox, unveiled as AT&T/T-Mobile was on life support. AT&T has to give up about 10 MHz of its spectrum portfolio in AWS licenses to T-Mobile as part of a breakup package. Many questions have also arisen over whether one or more of the top AT&T officials will ultimately leave the company. “It’s usual with these things when something goes this wrong, someone has to pay,” an industry official said.

"AT&T is spectrum-challenged, especially without T-Mobile,” UBS said in a research note. Even if it gets Qualcomm spectrum, AT&T would have an average of just 43 MHz of 4G spectrum in the top 100 markets versus 62 MHz for Verizon, UBS said. “AT&T has even more reason now to push Congress to pass legislation to mandate more spectrum auctions, preferably including the House provisions to bar unlicensed uses of re-purposed broadcast spectrum and to restrict FCC authority to limit auction eligibility or to impose net neutrality and wholesale access duties,” Stifel Nicolaus said in a research note.

T-Mobile also likely will now be in the hunt for more spectrum, industry officials said. T-Mobile is expected to surface once again as a leading voice in wireless, sometimes allied with Sprint Nextel or the small wireless carriers against AT&T and Verizon. AT&T has an experienced Washington staff, led by Tom Sugrue, former FCC Wireless Bureau chief. The carrier made relatively few filings at the FCC that weren’t merger related and company officials have spent little time lobbying the commission on other issues, since the deal was announced in March, records show.

"I think they will immediately come up on the screen as an advocacy voice that’s more driven to the competitive carrier philosophy,” said Rural Cellular Association President Steve Berry of T-Mobile. “They will feel liberated enough to pursue the lines of policy inquiry that they were pursuing prior to the announcement. … You're already seeing more ads on TV.” T-Mobile should emerge much stronger with the spectrum and money they're getting from AT&T, he said. “If they get as much as 10 AWS in most of the top 100 markets they're going to have enough spectrum to roll out HSPA,” he said. A preferred data roaming agreement with AT&T is “huge,” Berry said. T-Mobile needs “data roaming -- they have major markets but almost no spectrum outside major metropolitan areas,” he said.

T-Mobile should quickly reemerge as a power player on wireless issues, said Public Knowledge Legal Director Harold Feld. “For the last two months T-Mobile had some sense that we ought to get ourselves into position in case this didn’t work out,” he said. “They started with their competitive pricing plans again. … Once the DOJ challenged the merger, DT started to make some more prudent moves just in case things didn’t work out."

"My own view is that the cash plus spectrum plus roaming agreements is worth a lot more than its face value to T-Mobile,” said Andrew Schwartzman, senior vice president at the Media Access Project. “I would speculate that there may be private equity firms willing to try to buy T-Mobile and run it as a free-standing entity. At the right price, a whole lot less than $39 billion, it may be a good deal. As to the future, one of the things I learned over the last several months is that HSPA+ is pretty good, and maybe T-Mobile can make a go of it for a good while with a low-cost service that is not LTE.”

"I'd guess it is unlikely that T-Mobile will stay independent for too long, or that AT&T won’t aggressively look for other transactions to get the spectrum it feels it needs to grow,” said Free State Foundation President Randolph May. “But I am not foolish enough to predict what will happen next as company executives and investors evaluate the changing marketplace and technological imperatives. The one thing I know is this: I wish those in government had a little less confidence in their own assessments of future developments and more confidence in the marketplace to sort matters out unfettered by government intervention."

Other sources said it’s unlikely there’s another deal involving any of the biggest four carriers. Based on DOJ’s complaint, it’s clear that the government would want to have four major wireless players in the market, said telecom analyst Jonathan Schildkraut with Evercore. Even a Sprint/T-Mobile combination would be hard to get regulatory approval for, he said.

T-Mobile is going to need to partner with a smaller carrier like Leap, said Dan Crane, a law professor at the University of Michigan. A deal like that wouldn’t face much antitrust resistance because it would strengthen the fourth largest player and make it more competitive with the top three, he said. The DOJ’s complaint indicated the agency wants more players in the market, said Craig Moffett of Bernstein Research. As a result, mergers and acquisitions might not be a viable option, he said. He doesn’t expect major moves in the near term from either company. While AT&T still has some spectrum opportunities, the future is uncertain for T-Mobile, which was considering an IPO before the deal was announced, Moffett said. The carrier would have to come up with a 4G strategy if it were to reconsider the IPO option, he said. Meanwhile, though a $4 billion breakup is a lot of money, it wouldn’t change anything materially for AT&T, analysts said.

Both companies would need to reconstruct their public image as vital telecom competitors, said Andrew Gavil, an antitrust law professor at Howard University. AT&T needs to focus on improving its networks and services and even price, he said. Deutsche Telekom could reinvigorate T-Mobile, if only to restore some of its value in preparation for another future sale to anyone other than AT&T, Verizon and probably Sprint Nextel, he said. Alternatively, T-Mobile could recommit itself to being a long-term player, he said. Another option for T-Mobile is to “slice and dice itself among a number of smaller firms and still pursue an exit strategy” though it’s hard to find a buyer with the resources of AT&T, he said.