AT&T Inc. is selling its controversial $39-billion (U.S.) bid for Deutsche Telekom AG's U.S. unit as a fix for the staggering increase in mobile data traffic that is choking the wireless giant's network.
The deal, which radically alters the U.S. telecom landscape by removing the fourth-largest national carrier, is sure to attract intense regulatory scrutiny. But it would also bolster AT&T's stash of wireless spectrum - considered the real estate of the industry - and add thousands of cellular towers and antennas to its existing infrastructure. These are crucial issues for AT&T: Its high-profile struggle with dropped calls and slow service, the result of a sharp increase in the use of wireless Internet on devices such as the iPhone, has bruised its reputation, giving fodder to critics and rivals.
"This will improve network quality," Randall Stephenson, AT&T's chairman and chief executive officer, said in a conference call on Monday.
But the deal will also reduce the number of players in the United States' competitive wireless market. A merger of AT&T with the German company's T-Mobile USA would create a huge entity with about 130 million wireless subscribers - far bigger than that of Verizon Wireless, currently the largest player with about 94 million subscribers.
That raises the spectre of further consolidation and anticompetitive concerns for the Federal Communications Commission and U.S. Department of Justice. Those concerns likely explain the AT&T's language in explaining the deal, which focuses on benefits to the public such as infrastructure investments, American jobs, and the expansion of broadband Internet, a U.S. government and FCC priority.
"Above all else, this transaction represents a major investment and a major commitment by a U.S. company to advance America's leadership in mobile broadband … this infrastructure will be a competitive advantage for the United States for many years to come," Mr. Stephenson told analysts on the call.
Deutsche Telekom, the Bonn, Germany-based global giant that owns T-Mobile, has seen its U.S. venture falter over the past few years as it bled the most valuable customers to rivals - particularly AT&T, which until recently was the only carrier that could offer the iPhone. With Verizon gaining the wildly popular Apple device, and both AT&T and Verizon pulling far ahead of any other carrier, industry speculation had pegged the struggling No. 3 player, Sprint Nextel Corp., as a possible buyer for smaller T-Mobile.
But AT&T surprised the market on Sunday with an announcement that the boards of both companies had approved the deal. Its statement focused on spectrum and the benefits to consumers, while playing down job losses, synergies and fears that competition would wither.
Because the U.S. has had more wireless players for a longer period than Canada, and spectrum is divided among a larger number of competitors, problems such as those that have plagued AT&T's network are more acute in the U.S. than in this country, said telecom analyst Dvai Ghose of Canaccord Genuity in Toronto. But carriers have made acquisitions in the past in part to ease network congestion. Mr. Ghose also said Rogers Communications Inc. saw a noticeable increase in its network quality after its acquisition of wireless provider Microcell in 2004.
Ronald Gruia, an analyst with Frost & Sullivan, noted the additional spectrum and cellular infrastructure will help AT&T cope with data traffic in dense, urban areas where it has had the greatest problems. "It's a very valuable asset in some of their markets like New York and San Francisco, where their own spectrum is very constrained today," Mr. Gruia said.
"This is a big play by AT&T to improve its network. And it's no secret that AT&T's wireless service is widely seen as inferior compared to someone, like, say, Verizon."
AT&T now faces an arduous regulatory process, with a very uncertain outcome. But the company was confident enough in getting approval to agree to a breakup fee of $3-billion, to be paid to Deutsche Telekom, if the deal fails.
Analysts expect the company will be forced to make significant divestitures of customers and spectrum in markets where there are too few competitive alternatives. Informa Telecoms & Media analyst Thomas Wehmeier suggested there will likely be other concessions as well, such as signing tower-sharing agreements with, and granting roaming rights to, smaller competitors.