How is it being financed? AT&T said that the purchase will be funded through new debt, as well as cash currently on the company’s balance sheet. It will not take on any debt from either Deutsche Telekom or T-Mobile USA AT&T has an 18-month commitment…
How is it being financed?
AT&T said that the purchase will be funded through new debt, as well as cash currently on the company’s balance sheet. It will not take on any debt from either Deutsche Telekom or T-Mobile USA AT&T has an 18-month commitment with JPMorgan for a US$20bn one-year unsecured bridge loan, the syndication of which was reportedly completed ten days after the deal was first announced.
Barclays Capital, BoA Merrill Lynch, Citigroup and JPMorgan emerged with the largest chunks of the loan, US$1.8bn each.
BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, RBS, UBS and Wells Fargo are also reportedly involved, each taking a US$1.6bn slice of the loan.
AT&T will reportedly pay 75bps over Libor if it draws on the bridge loan, but if it remains undrawn, then the fee will be 8bps over Libor.
AT&T declined comment on these reports.
For its part, Deutsche Telekom gave some details of what it will be doing with the US$25bn it receives.
Some US$13bn will go on paying off debt. The pro forma ratio of net debt to EBITDA will be reduced from 2.2x to 1.9x, which represents a fall of 31%.
Another US$5bn will go on share buybacks, which will take place after the closure of the transaction.
DT said that its guidance for 2011 remained unchanged, and that it expects an adjusted EBITDA of E19.1bn.
The technology
The acquisition of T-Mobile USA by AT&T should present fewer technological challenges than that of the mooted merger between Sprint Nextel and T-Mobile USA.
T-Mobile operates GSM, HSPA+ and AWS technology, and is considering moving into LTE.
Sprint currently operates iDEN and CDMA, and (through its majority stake in the WiMAX network provider, Clearwire) has effectively backed WiMAX as a 4G technology in the short term.
AT&T offers a much closer technology fit to T-Mobile.
AT&T currently operates GSM/UTMS technology and HSPA+ as well as LTE.
US operators have increasingly come to be defined by whether they are backing LTE or WiMAX, although in other parts of the world the two technologies have been seen as more complementary than in conflict.
AT&T is targeting ambitious levels of synergies from the deal, up to US$3bn a year from three years after the close of the deal. This suggests that major savings can be found in bringing the two networks, with their accompanying technologies, together.
Spectrum
The other key consideration with this deal is spectrum, which is becoming an increasingly precious – and scarce – asset.
AT&T said it expects mobile data traffic in 2015 will be 8-10 times higher than the equivalent figure for 2010, and FCC Chairman Julius Genachowski has warned of the upcoming “spectrum crunch” on several occasions. He is attempting to free up 500MHz of spectrum for mobile broadband over the next decade, mainly through the means of voluntary incentive auctions primarily aimed at broadcasters.
But with that process meeting long delays in Congress and unwillingness by some broadcasters, T-Mobile USA was an attractive target for a spectrum-hungry AT&T.
T-Mobile has spectrum in the 1900MHz band for GSM, as well as spectrum in the 1700/2100MHz bands for AWS.
Citing figures from Bernstein Research, AT&T published a set of figures for the current spectrum holdings of the major mobile carriers in the US, calculated as a ratio of spectrum holdings (in MHz) divided by millions of subscribers.
AT&T currently has the lowest ratio at 0.86, but this will increase to 1.02 if the deal with T-Mobile USA is completed.
See graph on page 51.
Will the regulators/government allow it?
Both AT&T and Deutsche Telekom seem confident that this deal will get past regulators, but the sheer size of the combined company inevitably raises competition issues.
AT&T claims to have 95.5 million wireless customers.
Verizon Wireless claims to be larger, with 93.2 million wireless customers and 7.9 million “other connections”.
T-Mobile USA has 33.7 million subscribers, so the combined company with AT&T would have almost 130 million customers, at least at first.
AT&T is tackling the competition issue head on, stating: “The US wireless industry is one of the most fiercely competitive markets in the world and it will remain so after this deal.” It pointed to the fact that a large majority of American consumers can choose between five providers.
It also announced a series of sweeteners that may be used to convince regulators of the deal’s merits, including the expansion of 4G LTE coverage to 95% of the population, including large numbers of people in rural or underserved areas.
The FCC has not commented on the deal so far, but has certainly emphasised its desire to expand broadband coverage to the 24 million Americans who cannot currently access internet.
While AT&T’s lobbying power in Washington is formidable, its competitors and other critics are also applying their own pressure on regulators.
Sprint and Clearwire have attacked the deal for harming competition, although Verizon Wireless has kept a conspicuous silence.
Maury Mechanick, a partner at White & Case in New York, said that the case presents a “conflict between different policies” for the Obama Administration and the regulators, between their policies on competition and their policy to expand broadband coverage to underserved areas.
He said that AT&T will argue that the broader public interest of the deal overrides any anti-competitive aspects.
Even with this argument though, Mechanick believes that AT&T faces an “uphill battle” to get approval, and it will require much “creative argumentation”.
The regulatory investigations have already begun.
The New York Attorney General said on 29 March that he was planning a “thorough review” of the acquisition.
AT&T seems confident enough to agree a US$3bn breakup fee, transfer of some AWS spectrum and a roaming agreement with Deutsche Telekom if the deal falls through.
In the regulatory context therefore, this deal must be seen as a considerable gamble by AT&T.
Where does this leave Sprint Nextel?
Number 3 wireless carrier Sprint Nextel has openly attacked the deal, claiming that it would “reduce competition and harm consumers”.
It argues that if the deal is approved, the market will be dominated by two vertically-integrated companies with “unprecedented control” over the wireless post-paid market and key inputs to it, including the backhaul and access that rival companies need to compete.
Sprint’s antipathy is unsurprising, as this deal leaves it in a vulnerable position, especially after having come so close to a deal with T-Mobile USA itself.
It is now left with ageing technology, a subscriber base that would be less than 40% the potential size of AT&T/T-Mobile USA and Clearwire, the struggling WiMAX network provider in which Sprint has a majority stake.
Sprint says its strategy “remains unchanged”.
Yet it will almost certainly struggle to compete against Verizon Wireless and the new AT&T/T-Mobile, which (according to Sprint’s own estimates) would control almost 80% of the US post-paid market.
One obvious solution would be a merger with Verizon Wireless, but the latter has dismissed that possibility.
Options left for Sprint include partnerships with other cellcos like Leap Wireless or MetroPCS, or alternatively with the satellite/terrestrial venture LightSquared.
Any of these routes, however, would effectively mean Sprint backing both LTE and (through Clearwire) WiMAX.
Sprint’s CEO, Dan Hesse, reportedly said earlier in March that Clearwire was involved in “every option” for Sprint’s future, but that it remained to be seen how strong the Clearwire relationship would be compared to other options.
Clearwire’s losses grew last year and long-term, it faces a difficult fight against the LTE providers.
The AT&T/T-Mobile USA deal was probably therefore an unwelcome surprise for Sprint, leaving it in a difficult position.
