The Race for 4G: AT&T Buys T-Mobile

AT&T (NYSE:T) announced its proposed acquisition of T-Mobile in a cash and stock offer valued at roughly $39 billion. This is a significant announcement given the size of the two companies and since there was speculation that Sprint (NYSE:S) might look to acquire T-Mobile. Sprint’s shares were down 14% on this news. AT&T’s move pits it firmly against Verizon (NYSE:VZ) as both operators continue to build out their 4G networks. Our price estimate for AT&T’s stock stands at $35.80 which is around 40% ahead of the market price.

Our Quick Take …. Problems, But Potential

If we compare AT&T and T-Mobile’s voice and data coverage charts, it looks like there are no material additions to AT&T’s coverage. In other words, T-Mobile’s presence is not significant in any places where AT&T is not. Additionally, T-Mobile’s customers have lower ARPU (average revenue per user) of $52 compared to AT&T’s overall average ARPU of $62.57. ^[1] T-Mobile also has higher churn and lower wireless profit margins around 29% compared to AT&T’s 41% and churn stood at 3.4% compared to AT&T’s 1.3%. ^[1]

So why did AT&T then buy T-Mobile?

It’s All About Spectrum

As the company mentions, its all about spectrum and the race for 4G. AT&T and T-Mobile have similar GSM network with HSPA+ deployed making it easier to integrate, but the treasure lies in the additional spectrum that AT&T gets which will enable to company to extend LTE to more customers than it had originally planned. The spectrum holdings per subscriber (Mhz per million subs) for AT&T stood at 0.86, the least among the major U.S. wireless carriers. ^[2]

The company thinks that this is not enough to handle future traffic, and T-Mobile’s spectrum holdings offer a solution for the company. AT&T expects to gain synergies and move forward in the race for LTE deployment. This could well turn out to be a good move for the company as Verizon is ahead in terms of LTE deployment right now. With this boost, AT&T could have better LTE coverage to even the race.

In the short-term, the acquisition will help expand AT&T’s market share by a significant amount, but it will also put pressure on data ARPU and margins. However as the race for LTE intensifies, this broader deployment could be the kick AT&T needed.

You can see the complete $35.80 Trefis price estimate for AT&T’s stock here.

1. AT&T and T-Mobile Comparison, mobilizeeverything.com, 2010 data [↩] [↩]
2. Mobile broadband explosion and pressing demand for spectrum, mobilizeeverything.com [↩]