AT&T's decision to buy T-Mobile may have been partly motivated by a desire to keep the latter out of the hands of competitor Sprint. However, should regulators approve AT&T's bid to acquire the nation's fourth-largest carrier, Sprint may still get a part of T-Mobile, according to analysts at Citadel Securities.
While it has been widely suggested that AT&T would have to make a number of concessions to receive the approval of regulatory bodies, including the Federal Communications Commission, the analysts at Citadel suggested in a March 24 research note that AT&T executives are downplaying the scale of the efforts that will be required.
"AT&T has said it expects to have to make some concessions to get regulatory approval, but its initial working assumption is that no divestitures will be required," states the report. "We think this is likely an exaggeration, and that AT&T may, in fact, be ready to make very significant divestitures."
While AT&T's Stock Purchase Agreement filed March 21 suggests the carrier is ready to divest up to 40 percent of T-Mobile's subscribers, the Citadel analysts said, "We think AT&T may not be opposed to divesting even more in order to get the deal closed."
Far from considering paying a $3 billion reverse breakup fee, the report continued, AT&T will likely be content to acquire however much of T-Mobile the regulators will allow and to divest as much as it needs to. The divested portions, then, could be picked up by Sprint, which reportedly was interested in T-Mobile but unable to out-bid No. 2 market leader AT&T.
"[T]he eventual outcome of this deal could be that AT&T does successfully acquire T-Mobile, but is required to divest perhaps up to half of T-Mobile's subscribers," stated the report. "We would view this outcome as positive for Sprint, which we believe would be a likely bidder for the divested operations. Although not as favorable as a straight Sprint/T-Mobile merger (at a fair valuation), Sprint's ability to acquire some portions of T-Mobile would help it achieve better scale."
T-Mobile, being pulled in two directions, may appear to be a bit of a sorry victim in all this. Despite being the first U.S. carrier to offer an Android smartphone, it has had trouble competing against its larger rivals. During a presentation to investors Jan. 21, T-Mobile USA CEO Phillip Humm announced, "T-Mobile is now ready to turn the business around."
But save your tissues, Danish research firm Strand Consult said in a March 24 report. T-Mobile USA is simply a victim of mismanagement by executives of parent company Deutsche Telekom, who didn't apply lessons they'd learned elsewhere to their American undertaking, the analysts said.
Many of the problems T-Mobile was struggling with "could have been eliminated if they had just been a little better at identifying and utilizing the experience and information"-such as from carriers KPN and Telfort in Holland and E-Plus in Germany-"that they already had access to within their own international corporation," the report said.
For one, T-Mobile should have taken advantage of being a player based on GSM technology-the predominant protocols worldwide-competing against networks, such as Verizon and Sprint, which are based on CDMA (Code Division Multiple Access) technology. In South America, for example, carriers have done this successfully.
"There are many advantages when selling GSM-based mobile services," stated the report, "including roaming, easy reuse of mobile handsets and especially a far greater selection of mobile handsets that are most often significantly cheaper than corresponding CDMA mobile handsets."
Additionally, while carriers abroad were pursuing a more open value-added-services strategy, T-Mobile, suffering from "inferiority complexes regarding their American competition," stuck with the model being pursued by the other U.S. carriers.
"Today, most of the VAS market in the USA is simply bypassing the operators, with market players like Apple selling services directly to customers without operators receiving any revenue from that business area," Strand Consult said in the report.
The analysts also highlighted T-Mobile's decision to follow the most expensive type of distribution model; that it didn't learn from E-Plus' success in pursuing an aggressive MVNO (mobile virtual network operator) strategy; and that in focusing primarily on the prepaid market, it lost out on trends already playing out in other countries.
Deutsche Telekom's American T-Mobile venture, the report concluded, "has been scrapped; those that ought to be held responsible for this sad turn of events will not be accused of anything, and the shareholders will once again realize that they have invested in a company that despite all their experience and knowledge could not perform."
With the party over, it seems, it's now up to American regulators to decide just how the choice bits left behind will get divvied up. And that will take a while. According to a report in the Wall Street Journal, the FCC plans to proceed slowly-just as it did during a recent proposed merger between satellite radio providers Sirius Satellite Radio and XM satellite Radio. FCC Chairman Julius Genachowski has made clear that the FCC believes it's in the American people's best interests that there's "healthy competition" among carriers, all looking to offer fair prices and good service.
"There's no way the chairman's office rubber-stamps this transaction," an FCC official told Journal. "It will be a steep climb to say the least."