Leap would reportedly acquire all T-Mobile's customers increasing its subscription nearly 600 percent

There's been some movement on AT&T, Inc.'s (T) seemingly sinking effort to acquire America's fourth largest carrier, Deutsche Telekom AG's (ETR:DTE) T-Mobile USA.

I. FCC Lashes Out At Proposed Deal

The U.S. Federal Communications Commission (FCC) accepted AT&T's request to retract its filing for approval, after FCC commissioners publicly criticized the deal as being harmful to the public interest and threatened to hold a second trial to halt the merger/acquisition should AT&T escape the U.S. Department of Justice's effort to block the deal on antitrust grounds.

But the FCC wasn't done.  The agency filed a preliminary report [PDF] blasting the merger.  It summarizes that the deal would create "... significant harms to competition are likely to result, primarily in the form of increased prices for consumers, reduced incentives for innovation and decreased consumer choice."

AT&T -- your money stolen
The FCC says that an AT&T acquisition of T-Mobile would likely lead to consumer price gouging. [Image Source: Flickr]

The report is critical of math errors (pg. 70) in the AT&T filing, which overstate its benefits significantly.  It also calls the companies' claims that the deal would "create" jobs misleading at best.  It points to an AT&T memo, which stated that the post-acquisition AT&T would save "[redacted] million per year by eliminating jobs for General and Administrative (‘G&A’) employees."  The FCC says that the evidence it saw pointed to net job loss, despite some minor plans for job creation.

This is similar to our own review of AT&T's filing, in which we pointed to the fact that AT&T was trying to disguise under a fat pile of paper the fact that cumulative hiring would shrink, leading to a net loss.

AT&T complained about the release, which it called "troubling".  AT&T suggests that the release of the report went against standard procedure and should have been put to an official vote.  It writes:

The FCC has recognized that it is required by its own rules to dismiss our merger application. This makes all the more troubling their decision to nonetheless release a preliminary staff report on the merger. This report is not an order of the FCC and has never been voted on. It is simply a staff draft that raises questions of fact that were to be addressed in an administrative hearing, a hearing which will not now take place. It has no force or effect under law, which raises questions as to why the FCC would choose to release it. The draft report has also not been made available to AT&T prior to today, so we have had no opportunity to address or rebut its claims, which makes its release all the more improper.

On the other hand, Sprint Nextel Corp. (S), one of the earliest critics of the proposed merger and America's third largest carrier, "applauded" the deal, called its findings "clear", and point to other groups that have drawn similar conclusions.

It opines:

Today the FCC released the results of its nearly eight month investigation into AT&T's proposed purchase of T-Mobile. FCC Chairman Genachowski and the staff of the Commission have listened to the American consumer. Consumers are best served when competition is allowed to thrive. At Sprint we share this view and applaud today's actions by the FCC.

The investigation's findings are clear: approval of AT&T's bid for T-Mobile would lead to higher prices for consumers, eliminate jobs, harm competition, and dampen innovation across the wireless industry.

These are the same conclusions which led the U.S. Department of Justice and a bi-partisan group of Attorneys General from seven states and Puerto Rico to sue AT&T, Deutsche Telekom and T-Mobile in Federal Court in an effort to block the transaction.

Most importantly, these are the same conclusions reached by tens of thousands of consumers from across the country who have spoken out overwhelmingly against AT&T's proposed takeover of T-Mobile.

Retracting the filing was an important step backwards in the merger process, as FCC approval is required for the merger to succeed.  Combined with AT&T's attorney's predicting the deal will fail and taking a preemptive loss on their balance sheet, things look pretty bleak for the deal no matter how much AT&T complains about the FCC report.

II. None of the Numbers Add up in Fishy Reported Deal With Leap

Also of note, a Reuters report claims that AT&T -- in perhaps is the company's final effort to save the deal from death -- has proposed a wild scheme under which it would chop up T-Mobile USA's assets, selling most of them to Leap Wireless International, Inc. (LEAP), operators of the Cricket Communicates prepaid U.S. cellular network.

Reportedly Leap would purchase almost all of T-Mobile's USA's customers and the majority of its spectrum rights, which together would total about 40 percent of the $39B USD purchase.  AT&T would presumably keep the network infrastructure, selling service to Leap.  Leap, on the other hand, might lease some of its spectrum to AT&T.

There's reason for federal regulators to be wary of the deal.  Leap currently has around 5.8 million U.S. subscribers [source], but would be trying to swallow T-Mobile USA's roughly 34 million subscribers [source].  

More baffling still is where Leap is getting the money to pay for "40 percent of T-Mobile USA’s asset (Reuters).  That would be $15.6B USD of the total $39B USD cost of the deal.  To put that number in perspective, while Leap is profitable, its total 2010 revenue (not profit) was $2.69B USD.  Where it's conjuring up what would amount to multiple decades of its profits at current levels is a pretty compelling question.

Elephant vs. croc
Biting off more that you can chew: it would be outlandish for Leap to acquire T-Mobile, a company with nearly six times as many subscribers. [Image Source: National Geographic]

AT&T and Verizon Wireless (a joint venture between Verizon Communications, Inc. (VZ) and Vodafone Group Plc. (LON:VOD)) today own two thirds of a market through a bizarre series of mergers, acquisitions, and splits that have reduced competition in the market.

In that regard a "joint" deal with Leap may really be a deal propped up by AT&T for the sake of giving it a foothold in the T-Mobile USA network and quietly acquire Leap and/or the rest of T-Mobile USA's assets once scrutiny died down and regulatory conditions allowed it to do so.

Of course it's possible Reuters sources were somehow misinformed and this "deal" doesn't really exist.

The Wall Street Journal has suggested an alternate deal that may see Deutsche Telekom and AT&T entering into a joint venture to "save" T-Mobile USA.  Details of what this alternative to a full acquisition might entail are hazy at best.

Sources: FCC [PDF], AT&T, Reuters, WSJ

“So far we have not seen a single Android device that does not infringe on our patents." -- Microsoft General Counsel Brad Smith

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