News Column

Sprint, T-Mobile Could Talk Merger if AT&T Deal Dies

Nov. 28, 2011

Scott Canon

Last spring, Sprint Nextel dressed up a stocky guy in a dress much like the pink polka dot number that adorns the attractive young woman in ubiquitous ads for T-Mobile USA.

His picture appeared in an ad placed strategically to catch the eye of Washington policymakers and to urge them to block AT&T's plan to buy T-Mobile from Deutsche Telekom AG.

The man in the sun dress had a cigar in one hand, and below him the ad read: "No matter how you dress it up, this takeover is bad for consumers and the economy. Tell Congress to help stop AT&T's takeover of T-Mobile."

It looks as if it might be time for Sprint to fire up the cigar in celebration.

Developments this week make a merger that Wall Street once assumed would sail through now look all but sunk.

AT&T says it still wants to take over T-Mobile, but its withdrawal of an application with the Federal Communications Commissions sends a strong signal that it's cashing out.

"It looks as if they've admitted almost total defeat," said Donna Jaegers, a telecommunications analyst with D.A. Davidson & Co.

The deal's demise could set off a new round of possible mergers or acquisitions in the nation's highly competitive wireless industry. Overland Park-based Sprint, among the largest private employers in the Kansas City area, declined comment Friday.

The most speculated deal imagines Sprint's buying up what AT&T apparently won't be able to: T-Mobile. No. 3 Sprint had been rumored to be talking with Deutsche Telekom about acquiring No. 4 T-Mobile when AT&T announced its plans to snatch up the carrier.

"If (Sprint chief executive) Dan Hesse isn't already talking to Deutsche Telekom," Jaegers said, "he will be shortly."

Verizon controls 34 percent of the U.S. wireless market, AT&T 32 percent, Sprint 17 percent and T-Mobile 10 percent. If the AT&T merger went through, Verizon and AT&T would have had three out of every four cell customers in the country.

Sprint hired a new stable of Washington lobbying firms and teamed with a handful of consumer groups early this year to argue that the AT&T deal would have amounted to a duopoly likely to smother competition and innovation.

AT&T had argued that the merger fit neatly with the Obama administration's explicit goals of rapidly spreading wireless broadband coverage in rural areas -- that a combined AT&T/T-Mobile network was the fastest way to expand service. That's why some analysts expected the deal to clear regulatory scrutiny, and expected the best Sprint might hope for was to force the merged companies to sell off some spectrum and customers as part of the terms of approval.

But in the months after the deal was proposed to the FCC -- the commission must approve T-Mobile's transfer of radio spectrum licenses to AT&T -- the Occupy Wall Street movement and other political shifts have generated distaste for corporate consolidation. And suspicion built that the FCC doubted claims that the merger would create jobs.

Meantime, the Obama Justice Department filed suit to block the merger. Then word began to leak that the FCC's staff analysis found little to like about combining the second and fourth largest carriers in the country. Earlier this week, FCC Chairman Julius Genachowski said the deal did not meet the agency's standards. And this week he sent his fellow commissioners a request to refer the case to an administrative law judge -- a move almost certain to protract the approval process.

Most recently, AT&T made a request to withdraw its application. AT&T says it still wants to buy T-Mobile. So the withdrawal could be seen as an attempt to push a regulatory restart button. But the company also said it planned to take a $4 billion charge against earnings. That would reflect a breakup fee it had promised Deutsche Telekom if the deal went sour.

That could open the door for a Sprint/T-Mobile merger. Deutsche Telekom wants to get out of the U.S. wireless market, so it would still seem interested in selling. With a T-Mobile acquisition, Sprint would control roughly a fourth of the market and stand as a much more formidable competitor to Verizon and AT&T.

But the deal wouldn't be simple. For starters, the two carriers' networks use different technologies. So the combined company would have to offer parallel networks for a while and eventually go through the expensive process of replacing consumer handsets to get them all on the same network. It's similar to the problems that have made Sprint's merger with Nextel mostly a bust.

Sprint might not have to pay the $39 billion AT&T promised for T-Mobile -- prices tend to drop with the wealthiest bidder out of the picture -- but it still might cost more than Sprint could afford. The company expects a $5 billion cash shortage over the next two years along with other debt. So Deutsche Telekom might have to take some of the payments as a stake in Sprint.

Meantime, there are a number of cable companies and satellite television firms itching to get into the wireless business.

If T-Mobile were swallowed by AT&T, Sprint might have posed the most attractive option for a player such as Dish Network Corp. to gobble up and pump cash into. But if T-Mobile is available, it could look more tempting to a buyer than Sprint. It would be bought from Deutsche Telekom, so presumably wouldn't have the debt that burdens Sprint. And unlike the Nextel legacy still haunting Sprint, T-Mobile's phones work on a one-technology network.

"T-Mobile would be more affordable and less troublesome," said Rick Franklin, an industry analyst for Edward Jones & Co. "Sprint's a bit more of a mess."

Since the announcement that AT&T was trying to buy T-Mobile, Sprint announced plans for a $4 billion to $5 billion network upgrade. It also added the much-coveted iPhone to its list of handsets.

Meantime, a dizzying array of strange bedfellows either weighed in on the merits of a merger or notably sat out the conversation. The Communications Workers of America, which represents many AT&T employees, had said the merger would create 96,000 good jobs and allow unionized AT&T to absorb largely non-union T-Mobile. AT&T employs 12,000 people in Missouri and 1,800 in Kansas.

Politicians with strong connections to AT&T or its unions typically came out for the merger. A smaller number, often with connections to Sprint, opposed the deal. Most recently, Kansas Attorney General Derek Schmidt opposed the deal in a letter to the FCC on Monday. Missouri Gov. Jay Nixon said last week that he generally favored the merger, although he said the ultimate terms needed to be looked at. Fellow Democrats Missouri Sen. Claire McCaskill and Rep. Emanuel Cleaver of Kansas City were noticeably uncommitted.

Now those same parties could find themselves adjusting the rhetoric they applied to AT&T's buying a carrier to a debate over whether Sprint could combine with T-Mobile, or whether a cable company should be allowed to swallow a wireless business.

Analysts generally think a combination of two smaller companies would face less regulatory resistance, because it would pose smaller antitrust worries.

For now, the attention turns to what might become of T-Mobile, the company that has marketed itself with the cute woman in the flouncy dress.

"T-Mobile is the pretty, jilted girlfriend," said Jaegers, the telecom analyst. "It's going to be interesting to see who wants to date her."

Source: (c) 2011 The Kansas City Star (Kansas City, Mo.)

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