A woman enters a T-Mobile store in New York. Photographer: Jin Lee/Bloomberg
AT&T Chief Executive Officer Randall Stephenson. Photographer: Tim Boyle/Bloomberg
AT&T Inc. (T) agreed to buy T-Mobile USA from Deutsche Telekom AG (DTE) in a cash-and-stock transaction currently valued at about $39 billion, a combination that would create America’s largest mobile-phone company.
The purchase price will include $25 billion in cash and the balance in AT&T stock, subject to adjustment, according to a statement today. The deal may give Deutsche Telekom an 8 percent stake in the Dallas-based carrier, which will add a Deutsche Telekom executive to its board of directors.
The deal would allow AT&T, now the second-largest U.S. wireless operator, to add about 34 million customers and surpass Verizon Wireless. The acquisition, the largest in the wireless industry since 2004, may face regulatory scrutiny because it combines the second- and fourth-largest wireless providers, reducing consumers’ choices.
“This is a very surprising deal,” Jonathan Atkin, an analyst at RBC Capital Markets, said in an interview. “AT&T is certainly buying scale. AT&T can integrate T-Mobile from an operations standpoint fairly easily because they use the same technology.”
AT&T said that it would expand the rollout of its high- speed wireless technology, called Long-Term Evolution, or LTE, under the T-Mobile agreement. AT&T will offer the service to an additional 46.5 million people as part of the deal, helping achieve the Federal Communications Commission goal of making broadband available more widely, the company said.
‘Very Confident’
“We studied this thing extensively over the last few months and we’re very confident it will be approved,” Randall Stephenson, AT&T chairman and chief executive officer, said in an interview. “Most local markets have a choice between five carriers, so the space will remain fiercely competitive.”
The agreement has been approved by the boards of both companies, Deutsche Telekom said in a statement.
The deal is the largest for AT&T since the acquisition of BellSouth Corp. in 2006 for about $83 billion, according to data compiled by Bloomberg. It’s the largest takeover to be announced in the wireless industry worldwide since 2004, when Sprint agreed to merge with Nextel Communications Inc., and the sixth- largest mobile-phone deal of all time.
Since taking over as CEO in 2007, Stephenson has focused on growth through wireless services, rather than the multi-billion- dollar acquisitions common under his predecessor, Ed Whitacre. AT&T began selling Apple Inc. (AAPL)’s iPhone in June 2007, and wireless data has since become one of its fastest-growing offerings, with revenue up 27 percent in the fourth quarter.
IPhone Exclusivity
AT&T lost its exclusive hold on the iPhone in the U.S. this year, as Verizon Wireless began selling the device to its customers in February. Analysts estimate Verizon Wireless may sell 11 million iPhones this year, the company said that month.
The T-Mobile deal may give AT&T a way to boost earnings because of the money the companies would save by combining their operations. The companies’ estimate that they could have $40 billion in synergies is a realistic assessment, said Jonathan Chaplin, an analyst with Credit Suisse Group AG.
“Phenomenal deal if it happens,” Chaplin wrote in a research note today. “Huge upside for AT&T; DT getting a great price; however, we believe regulatory risk is enormous.”
In the last five years, the median deal price for a telecommunications company has been 4.5 times earnings before interest taxes depreciation and amortization, according to Bloomberg data. Deutsche Telekom said the purchase price is multiple of 7.1 times 2010 adjusted EBITDA.
Regulatory Issues
The deal drew criticism for its potential to reduce the number of wireless competitors.
“Don’t believe the hype,” S. Derek Turner, research director the Washington-based advocacy group Free Press, said in a statement today. “There is nothing about having less competition that will benefit wireless consumers.”
There were 296.3 million wireless subscribers in the U.S. at the end of 2010, according to estimates from researcher eMarketer. Adding AT&T and T-Mobile would give the combined companies 38.8 percent of that total, according to data from eMarketer and ComScore Inc., while Verizon Wireless has 31.3 percent.
To get the deal through, regulators might require that T- Mobile and AT&T divest some operations or agree to certain conditions, such as promising to build out their network in certain, underserved markets, said Roger Entner, an analyst at Recon Analytics in Boston.
AT&T Financing
Still, the combination would help alleviate some of the spectrum crunch that regulators have been struggling with, he said. The two companies would be able to share airwaves, which may help persuade the FCC and the Department of Justice to approve the deal, Entner said.
Robert Kenny, a spokesman for the FCC, which is to review the deal alongside antitrust authorities, declined to comment.
Deutsche Telekom held talks about selling T-Mobile USA to Sprint Nextel Corp. (S) in exchange for a stake in the combined entity, people with knowledge of the matter said this month. The companies hadn’t been able to agree on the valuation of T-Mobile USA, the people said.
The unit, which accounts for about a quarter of Deutsche Telekom’s revenue, has reported declining earnings as it missed out on the iPhone and it lagged behind competitors in building out a higher-speed wireless network.
Cash and Stock
AT&T said the cash part of the purchase price will be financed from the holdings on AT&T’s balance sheet and new debt. AT&T has an 18-month commitment for a $20 billion unsecured bridge loan from JPMorgan Chase & Co. (JPM) The company is not assuming any debt from T-Mobile or Deutsche Telekom.
AT&T has the right to increase the $25 billion cash portion of the purchase price by up to $4.2 billion, offset by a reduction in stock, as long as Deutsche Telekom receives at least 5 percent equity interest in AT&T, the company said. The number of AT&T shares issued will be based on a 30-day average prior to closing. That is subject to a collar that protects Deutsche Telekom from price fluctuations of more than 7.5 percent.
AT&T rose 20 cents to $27.94 in New York Stock Exchange composite trading on March 18. The stock had declined 4.9 percent this year. Deutsche Telekom, little changed this year, fell 1.3 percent to 9.59 euros in Frankfurt trading.
The T-Mobile transaction, subject to regulatory approval, is expected to close in about a year, AT&T said. AT&T was advised by JPMorgan, Greenhill & Co. and Evercore Partners on the deal.
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