Analysts: AT&T / T-Mobile Deal Approval in Question

By Sheena Lee

AT&T (T) has made a bold move to acquire Deutsche Telekom’s (DTEGY.PK) T-Mobile USA for $39 billion. And while investors are optimistic, analysts worry whether the deal will receive a green light from Washington regulators.

“AT&T / T-Mobile is apt to be scrutinized more thoroughly than any other merger to date by the Obama administration,” said Jeffrey Silva, an analyst with Medley Global Advisors in Washington. “The FCC is expected to come under heavy pressure from consumer advocates, public interest groups and congressional Democrats to block the deal.”

A failure to complete the deal would mean AT&T may need to pay a breakup fee of $3 billion and some spectrum, said two people with knowledge of the matter, according to Bloomberg News. The break-up fee was also a significant factor as to why T-Mobile eventually chose AT&T for the merger instead of Sprint Nextel (S).

Greg Miller of Collins Stewart, who has a $29 price target on AT&T shares, reiterated a Neutral rating, but was also worried about regulatory barriers. “With the proposed merger that would result in AT&T having 129 million wireless subscribers, or roughly 43% of the U.S. total, we expect the most obvious call by everyone will be that the deal is likely to face stiff FCC and maybe even DOJ opposition.”

“This is the defining test of the antitrust policies of the Obama administration,” said Former Federal Communications Commission Chairman and antitrust lawyer Reed Hundt.

“This is a significant horizontal consolidation by all the traditional measurements. This level of concentration, two-thirds of the time, has been rejected by the Department of Justice.”

However, RBC Capital analyst Jonathan Atkins pointed out that the stiff regulatory challenge may be eased somewhat by the fact that the big telecom workers’ union, the Communications Workers of America, came out in favor of the deal Sunday. Atkins has a $29 price target on AT&T.

AT&T CEO Randall Stephenson seemed confident that the deal will go through. “If you look across the United States, the majority of all Americans have an option to chose five different service providers for their wireless service. So you combine all of that and we think after a very thorough review, this transaction will be approved.”

Philip Marshall of Tolaga Research said the deal would give AT&T more spectrum in key markets like California where the operator’s performance is poor. “However, I think of more importance is the relative market scale that AT&T will have over its competitors. Let’s face it, in the U.S. mobile market, scale is king,” he said.

The fact that AT&T and T-mobile use GSM and operate on similar frequencies will also make the transition easier than some of AT&T’s past deals, said Charles Golvin, an analyst at Cambridge, Massachusetts,-based Forrester Research. “I don’t want to trivialize it, however the two companies do use the same network technology,” Golvin said. “A T-Mobile phone will work on AT&T’s network today.”

But some analysts are also concerned that taking on T-Mobile customers will further slowdown AT&T’s network, used by millions of iPhone subscribers. “That network is already struggling and has been ever since they landed the iPhone, so that network isn’t ready to dump a bunch of T-Mobile customers onto it,” said Sanford C. Bernstein analyst Craig Moffett, who rates AT&T at Market Perform with a $28 price target.

AT&T was upgraded to Overweight from Neutral at HSBC, which took its target to $32 from $30.

AT&T would become the largest carrier in the U.S. and have 130 million subscribers under the deal, versus 100 million for Verizon, out of a U.S. total of 293 million.

Source: Alacra Pulse, Bloomberg, Barron's, Reuters, Wall Street Journal, CNBC, Minyanville.