AT&T Acquires T-Mobile USA
The final purchase price tag consists of a cash payment of US$25 billion with the balance to be paid using AT&T common stock, subject to adjustment. In this agreement, approved by the Boards of Directors of both companies, AT&T has the right to increase the cash portion of the purchase price by up to US$4.2 billion with a corresponding reduction in the stock component, as long as Deutsche Telekom would receive at least a 5% equity ownership interest in AT&T.
M&A experts have said AT&T is paying Deutsche Telecom AG a significant premium for T-Mobile. JPMorgan valued T-Mobile about US$14 billion lower at US$25 billion, and even last December Bank of America-Merrill Lynch valued T-Mobile at around US$23.2 billion.
In the company press release, AT&T CEO Randall Stephenson estimated that total savings for both companies would reach US$40 billion, and acquisition will improve AT&T wireless voice and data network quality instantly. It will also get them closer to bringing future LTE (~3.9G) capabilities to more than 294 million American consumers, about 95% of the American population.
"This transaction delivers significant customer, shareowner and public benefits that are available at this level only from the combination of these two companies with complementary network technologies, spectrum positions and operations" — AT&T Chief Executive Officer, Randall Stephenson [March 20, 2011]
After regulatory approval, the combined entity will have more than 130 million subscribers (at the end of 2010, AT&T had 95.5 million wireless subscribers and T-Mobile had 33.7 million subscribers), increase AT&T’s total wireless revenue from US$58.5 billion to nearly US$80 billion, and increase the percentage of AT&T’s total revenues from wireless, wireline data and managed services to approximately 80%.
US Market Analysis
Placed in its own context, this acquisition is quite an astonishing opportunity for both T-Mobile and AT&T. Without a doubt the telecommunications industry in the US will be impacted dramatically.
According to the Telecommunications Industry Association (TIA), the US telecommunications industry represented one-third of the world telecommunications revenue in 2009 and employed close to one million people in the US.
The US Census bureau has estimated that in 2009 the total telecommunications revenue was at half a trillion US$ making it close to 3.4% of the US GDP.
Almost evenly split between wired, wireless and cable, all telecommunications companies have seen their revenue declining in every segment but wireless. With an ARPU (Average Revenue Per User) of US$48.16 in 2009 according to the Cellular Telecommunications & Internet Association (CTIA), the US market is quite lucrative and very competitive at the same time [note that iPhone ARPU is north of US$90].
With 292.8 million mobile phone subscribers in total (93.0% penetration rate), the US has still some room to reach the comparable level of mobile-heavy markets such as Hong Kong [187.9% penetration], Italy [147.4%] or Russia [147.3%]. With only 20% of users having Smartphones, but with an increase of 18% over the last 6 months in 2010, Americans are finally embracing the 3G revolution and migrating at a fast speed to what other developed markets on the planet have done a long time ago.
After the US federal regulators, the Department of Justice (DoJ) and Federal Communications Commission (FCC) approve the acquisition, the former Big 4 will become Big 3 with a clear winner as AT&T, followed by the distant second Verizon and the laggard third Sprint. The remaining 20 or so regional followers could only account for less than 14% of the total market. The US market will shift to a duopoly with little competitive room for a potential incumbent in this capital-intensive industry that is telecommunications.
Build, Buy, Borrow or Collaborate
Since the iPhone launch on June 29, 2007 and the Apple cult of PR machines, consumers and media, AT&T has been put under an unflattering spotlight. Dropped calls, network congestion, blind spots, or customer dissatisfaction seem to happen only on AT&T network.
The truth is that AT&T’s mobile data traffic grew 8,000 % since 2007 and by 2015 it is expected to be 8-10 times what it was in 2010. A decade ago mobile data traffic was non-existent and networks were only designed to carry voice and SMS but nothing more. By year-end 2010, AT&T was carrying around 12 petabytes per month of mobile traffic alone. Because cell towers are shared among all customers, a single iPhone heavy user is sufficient to impact all the neighboring users who could not use their mobile phone to call or send an SMS.
Despite a US$2 billion commitment to upgrade their network in January 2010 and a tentative containment of their ever-hungry unlimited data plan users in June 2010, AT&T still had not managed to slow down the exponential mobile data growth or upgrade their network fast enough to catch up with users' appetite.
Facing such resource constraints, carriers could do several things to expand their wireless network:
[a] Build More Cell Towers.
In large agglomeration, where most mobile users are, in cities, it usually takes a very long time to have an approval site by municipalities, even though the FCC has recently put in place a “shot clock” regulation to expedite tower building approval. According to wireless industry lobbyists, in June 2008 there were 760 new tower placement applications nationally that have been waiting for approval for at least one year, and 180 applications that have been in wait at least three years.
[b] Buy More Spectrum.
Keeping the same infrastructure, carriers could also buy spectrum from the FCC, and augment instantly their bandwidth by directing the new air traffic from one bandwidth to the other, depending of course whether the mobile phone device can “speak” on the spectrum (nowadays it costs almost nothing to add an extra spectrum to a mobile phone; the latest Nokia N8 for example is a Penta Band). AT&T has recently acquired some spectrum slots from Qualcomm (upon FCC approval) or Aloha Partners but nothing sufficient to fix their current problem. Until now, the FCC has not released any more spectrum to keep up with the mobile data explosion, and do not intend to do so for some time, although it is aware of the problem.
“The explosive growth in mobile communications is outpacing our ability to keep up. If we don’t act to update our spectrum policies for the 21st century, we’re going to run into a wall — a spectrum crunch — that will stifle American innovation and economic growth and cost us the opportunity to lead the world in mobile communications.” — FCC Chairman, Julius Genachowski, [October 2010][c] Collaborate with Competitors' Cell Towers.
This is where it is becomes a bit technical, but it could be summarized like this. Verizon and Sprint use EVDO time division multiplexing and can share towers. AT&T and T-Mobile use GSM technology with Frequency Division and can share towers. EVDO and GSM are not compatible and cannot share towers. The bottom line is that beyond technology capability, tower sharing is only plausible if companies enter into a partnership, but this is extremely difficult when companies are fierce competitors.
[d] Borrow Competitors' Cell Towers.
In remote areas or second and third tier cities, private wireless companies have managed over the years to build local mobile wireless network. nTelos in Virginia, or Cincinnati Bell in Ohio are good examples of companies that have found a local market and provide competitive service to the big national carriers. Unfortunately alternative carriers are not located in large urban areas where the biggest problems reside. Renting cell towers are usually not done in dense urban areas where coverage is done exclusively by national carriers who compete ferociously with each other.
After having explored all different possibilities AT&T was convinced that an acquisition at the right price would be the only move left that could put them not only in the leading position, but also help them to leap forward in current infrastructure building, and give them some breathing room to build the next generation network called LTE. Cornered by the now non-exclusive release of the iPhone from competitor Verizon early this year, AT&T was looking for their next move to put them in a different league altogether. When rumors of a merger between Sprint [#3] and T-Mobile [#4] surfaced earlier this month, AT&T jumped in to offer the best deal possible to acquire T-Mobile from its German parent Deutsche Telekom.
Why Does It Make Sense?
With T-Mobile, AT&T is not just buying a rival but buying 5 years worth of infrastructure development and a customer-friendly company in the market place. In a single move AT&T has managed to acquire the only potential sizable competitor that could be integrated rapidly and have a high return on investment immediately on the acquisition completion date. Network integrations are indeed the easiest part in a telecommunication merger if technologies are compatible (which is the case in this acquisition).
The merger will guarantee the deployment of a robust LTE network to 95% of the US population, something neither company could achieve on its own. With the T-Mobile acquisition, AT&T will improve its total number of cell towers by 30%. In major markets like New York, San Francisco, and Chicago, the number of AT&T cell sites will grow by 25%-45%, and in many areas, the total capacity should simply double.
With no clear vision for its network future, T-Mobile has in reality put itself for sale, and the parent Deutsche Telekom was quite interested for a while in divesting a costly American investment (over US$50 billion).
The FCC and the DoJ will be tempted to block this acquisition because it would create a duopoly (Verizon and AT&T) with over 70% of the wireless market share. AT&T is already anticipating a long and difficult regulatory probing in the coming months, which is why the company has referenced many parts from the President Obama's State of the Union message in its dedicated acquisition website [mobilizeeverything.com].
The FCC and DoJ will finely scrutinize the acquisition and in certain cases will demand some adjustments to maintain some sort of competitive market in specific regional areas, but the lengthy battle will see in the end the last big telecommunications consolidation in the US market, and the colossal breakup fee (US$3 billion) will be remembered as an academic detail in the world of M&A.