AT&T is celebrating Thanksgiving with a costly admission: its $39-billion (U.S.) bid to gobble up T-Mobile USA might be a turkey, and it's setting aside $4-billion to cover the break fee. Pulling the deal would also deprive T-Mobile's parent, Deutsche Telekom , of a long-sought U.S. exit. The festive doom doesn't end there. For M&A bankers, failure is starting to look the norm.
Both sides say they are still working on making the transaction happen. And the timing of the announcement – with markets closed for the most important U.S. holiday – is hopefully driven more by regulatory process than what would be a crass attempt to bury bad news. But the fourth-quarter charge is a signal things look tricky. Analysts at Bernstein say U.S. accounting rules are often interpreted as requiring charges for liabilities with an 80-per-cent-plus probability.
True, Wall Street had pencilled in roughly $6-billion in compensation for DT in the event of failure. But the hit consists of both a $3-billion cash break fee (in itself a record, Thomson Reuters data show) and mobile spectrum, assessed at its book value of $1-billion. The spectrum's market value may of course be higher. Add back a roaming deal that's excluded from the charge, and the full reckoning could yet prove closer to consensus.
AT&T has perhaps the most to lose: a chance to become the No. 1 U.S. wireless player, and a deal that would yield more in savings than its headline price. Management's bravado would look badly misjudged. Meanwhile, DT's consolation prize wouldn't fully make up for losing its best option to exit the United States. Other deals are conceivable, perhaps involving cable, but would ascribe less value to T-Mobile. The possible demise of the year's biggest M&A deal is yet another blow for the advisory community, which has tasted and lost other ambitious transactions including News Corp.'s possible $12-billion buyout of broadcaster BSkyB and G4S's $8.4-billion tilt at support-services rival ISS.
Still, the list of potential winners looks longer – rival network operators, handset makers and network equipment firms would probably rejoice, as would grumbling consumers and the two regulators that opposed the deal. For the naysayers, at least: happy holidays.