Government Delivers Blow to AT&T and T-Mobile Deal

AT&T’s (NYSE:T) planned purchase of T-Mobile was smacked with a nasty setback yesterday when the U.S. government filed an antitrust lawsuit to block the proposed deal, saying it would hurt competition in the U.S. wireless market and ultimately lead to higher prices in nearly all of the major wireless markets. ^[1] Through this acquisition, AT&T would have displaced Verizon (NYSE:VZ) as the #1 U.S. wireless carrier, but this seems like a long shot following yesterday’s announcement. AT&T’s stock was down by around 4% yesterday and our $38.75 price estimate for AT&T stock is about 35% above market price. Sprint (NYSE:S), which has been vehemently opposing this deal will be the biggest beneficiary if the deal doesn’t go through, as evidenced by Sprint’s 6% rally yesterday. Our $4.75 price estimate for Sprint stock is about 25% above market price.

AT&T T-Mobile Deal Hampered with Obstacles

Ever since AT&T announced its plans to acquire T-Mobile for $39 billion in March this year, problems haven’t stopped for the company.

A few weeks ago, the FCC informed AT&T that its proposed acquisitions of T-Mobile and Qualcomm’s (NASDAQ:QCOM) 700 MHz spectrum will be informally reviewed together in a “coordinated manner” rather than as a separate transactions, thereby indirectly asking AT&T to justify such a massive purchase of spectrum (see AT&T Faces Another FCC Hurdle in Bid for T-Mobile).

Now an antitrust lawsuit from the U.S. government makes the case even more difficult. If this doesn’t go through, AT&T will have to pay T-Mobile parent Deutsche Telekom an estimated $6 billion in cash and other assets as part of the original deal. ^[1]

Hoping to Leapfrog Verizon’s Reach

AT&T has consistently argued that the U.S. wireless industry will remain competitive if the T-Mobile purchase were to gain federal approval. In expanding its 4G LTE network and merging the two companies’ wireless networks, AT&T has maintained that the deal would create jobs and generate economic growth. In the remote possibility of the deal going through, AT&T would acquire additional spectrum, which will help it expand capacity, improve service and give it a competitive edge over Verizon.

Sprint Benefits the Most

In our earlier note titled AT&T Deal Looks Bad for Sprint – What Can Sprint Do?, we discussed how this deal could put the rest of the telecom industry at the mercy of AT&T and Verizon and Sprint at a distinct disadvantage.

However, now with the deal looking unlikely to succeed, Sprint could see a fresh boost of life.

See our complete analysis for AT&T stock here

1. U.S. moves to block AT&T’s purchase of T-Mobile, Reuters, August 31, 2011 [↩] [↩]