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Move could pay off in the long run, if reduced competition allows it to raise prices

While many took AT&T, Inc.'s (T) accountant's write-off of a loss regarding the likely failure of the proposed $39B USD acquisition of Deutsche Telekom AG's (ETR:DTE) T-Mobile USA as a retreat call, AT&T insists it will break the bank to save the deal.

I. AT&T Has $10B USD Extra to try to Convince Government to Approve Deal

AT&T, recently named America's worst carrier in customer satisfaction for the second year in a row by Consumer Reports, now says it's willing to spend a whole lot more cash to try to defeat multiple levels of the U.S. government in court and seal the deal.  Chief Financial Officer John Stephens was quoted by Reuters at a UBS media conference in New York as saying that his company had $38B USD on hand to complete the acquisition, which many experts say grossly overvalued T-Mobile from a pure network infrastructure perspective.

Of the $38B USD extra AT&T says it's able to levy to seal the deal, $10B USD is in cash, $20B USD is a bridge facility (venture capital loan), and $8B USD is a "backup".

AT&T has promised $25B USD in cash, and can pay an additional $4.2B USD in cash under certain conditions.  Still, this leaves $8.8B USD of the $38B USD cash on hand (if you include the backup), which AT&T seems to be suggesting it could levy either in lobbying or in legal representation to fight to push the deal through. 

There's several tactics AT&T could try with the extra money.  First it could pay campaign donations to state officials to try convince them to abandon their lawsuits against the proposed acquisition.  It could try to offer similar payouts at a federal level to try to sway federal regulators.   It could use similar payouts to convince rival Sprint Nextel Corp. (S) to drop it's objections.

Alternatively, it could put the funds towards buying more legal support and trying to strike down the state, U.S. Department of Justice (federal) [details], and U.S. Federal Communications Commission's (federal) [details] pending cases against the merger.

Either way, AT&T is willing and able to pay tens of billions to push the deal through, says Mr. Stephens.  He comments, "We continue to move forward with our efforts to complete the T-Mobile transaction...and we will continue to pursue the sale.  So we clearly have an ability to close the deal very quickly and have those resources.  That is the plan."

II. Gamble Could Pay Off by Reducing Competition, Raising Prices

At this point, there's little doubt that the deal isn't truly about AT&T acquiring spectrum or improving coverage.  AT&T's own legal documents put the value of T-Mobile's 3G at $3.8B USD.  Even adding in the likely larger premium on T-Mobile's spectrum holdings (valuation unknown), it seemed difficult to fathom where T-Mobile came to its $39B USD valuation, at least from a pure network capacity basis.  

Now with it indicates willingness to spend, in effect, up to $8.8B USD to push the deal through the picture has been made even clearer that the move is more about gaining market share and reducing competition.  Of course spectrum and coverage are clearly part of the value of the deal, too, but it's obvious they're a smaller part of the equation.

Stormtrooper Legion
It's hard to put a price tag on ruling the galaxy. [Image Source: LucasFilm]

And the move could pay off for AT&T in an anticompetitive sense, despite the enormous cost.  If it can use its $8.8B USD club to stomp out government dissent, it will become the nation's largest carrier.  The number of major players on the market will be reduced to three, with AT&T and Verizon Wireless (a joint venture between Verizon Communications, Inc. (VZ) and Vodafone Group Plc. (LON:VOD)) owning 80 percent of subscription contracts.

If that situation unfolds, AT&T and Verizon (who's mildly supportive of the deal) should be able to jointly (but "independently") raise contract prices, increasing profits to much higher levels than are possible today.  The cost of market entry for a new nationwide telecom makes it unlikely that anyone would be able to stand in the way of these record profits.  And if Sprint goes bankrupt then literally no one would be standing in the way.

In this best case scenario for AT&T -- where it and Verizon are the only large national level subscription carriers -- its increased revenue could easily recoup the $8.8B USD it's willing to drop to push the deal, and much of the $39B USD cost of the core deal as well.

Update/Clarification  12/8/2011 1:20 p.m.:

There's be some questions surrounding the initial figure $77B USD with respect to the deal, or that the additional $38B USD was being paid towards the cost of the deal, not the additional lobbying efforts/legal costs.

Explicitly, Reuters correspondent Nicola Leske writes:

AT&T plans to use the $10 billion cash it had accumulated on its balance sheet to prepare for the closing of the T-Mobile deal, Stephens said. In addition, the company has a $20 billion bridge facility and an $8 billion backup in place.

The phrase "prepare for" suggests, would suggest the cash is being appplied to try to grease the wheels, so to speak, and push the deal through regulatory hurdles -- not to finance the deal itself.

Additionally the Reuters report states:

AT&T Inc plans to forge ahead with its deal to buy Deutsche Telekom's U.S. wireless unit despite fierce regulatory opposition, and it has the financial resources to close the acquisition quickly, a top executive said on Wednesday.

Again the phrase "quickly close" stands in stark contradiction to earlier reports and would suggest some sort of financial push on AT&T's part to get the deal approved.

Upon further inspection it appears however, that the Reuters report was merely a bit of poor wording on the article's part, and a bit of poor interpretation on my part.  The $20B USD lines up with the original press release for the deal.  However Mr. Stephens' commentary does suggest a $8.8B USD extra cash pile to be used to possibly push the deal (the "backup").

AT&T spent close $16M USD last year in reported lobbying (and likely more through PACs and other means of donation obfuscation), so you can guess where some of that money might go.

Source: Reuters





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