Everyone is still dazed from the sucker punch they received from AT&T’s press release regarding its buyout of T-Mobile USA. Questions are being flung left and right but answers are limited, if they even exist at all. What happened to the Sprint deal we’ve been hearing about for years? Will the FCC and anti-trust regulators even let this happen? Who was phone? Over the next twelve months we will get the answers to those questions but for now we can speculate based on the info we have. And I speculate that AT&T just trolled the wireless industry…hard…and T-Mobile is playing along.
Like A Boss
AT&T’s CEO Randall Stephenson is a smart man when it comes to risky business. He rose through the ranks and when he was promoted to Chief Financial Officer in 2001 he immediately went down the debt-reducing warpath which he continued after he became Chief Operating Officer in 2004. To get an idea of what this guy is capable of, I’ve been struggling to reduce some financial debt I’ve dug myself into over the last five years which amounts to somewhere in the thousands. In the five years from 2001 to 2006, Stephenson took AT&T’s $30 billion in debt and reduced it down to zero. He was also the reason AT&T signed an exclusive deal with Apple for the iPhone. Yes, this guy is serious business. He’s also a close friend to Carlos Slim. Cash money billionaires gotta represent!
So this was the guy, and not Ralph de la Vega the CEO of AT&T Mobility, that brokered the deal with Deutsche Telekom to buy T-Mobile USA in just three months. That’s pretty impressive, considering how Sprint’s Dan Hesse was rumored to be vying for Catherine Zeta-Jones T-Mobile for years now. So how did Stephenson do it? Is he just that big of a mack daddy that Magenta’s CEO Phillipp Humm hummed right over to Randall’s side? Or is something bigger at play here?
Big Brother Is Watching
First come the legal issues with the deal. The Obama administration is not the nicest group of people to have as overlords if you want to broker a multi-billion dollar corporate transaction. The United-Continental airline merger weighed in at a mere $3.2 billion, a drop in the bucket compared to the $25 billion in cash and $14 billion in stock that amounts to the $39 billion purchase price of this deal (Gonzo’s math, not mine). The question is will spectrum be enough of a concession for this deal to go through? When the second largest mobile carrier in the nation buys the fourth largest carrier and whose combined weight amounts to over a third of the nations population in subscribers, people begin to shit bricks. AT&T is hoping that the carrot-on-a-stick for the Feds will be the deal’s major broadband deployment expansion to rural areas but that might not be enough.
The FCC already said that the wireless industry was not “effectively competitive” last year. AT&T and Verizon already hold 60% of the country’s mobile subscriptions. The merger would leave Sprint and any other regionals like US Cellular so far behind in the game that they would be more or less out of it. This huge reduction in competition usually leads to increased prices and reduced consumer choices and reduced innovation. However, AT&T’s regulatory team is said to be the best one out there, so you never know.
Always Talking Turkey (ATT, Get It?)
So the tl;dr up to this point is that Randall Stephenson is brilliant, he brokered a deal with T-Mobile in three months while Sprint’s Dan Hesse was trying to do the same for years, and the probability that the government will approve this deal is low. So either Stephenson lost his mind or this was a very well calculated maneuver. Let’s take a peek at the deal’s fact sheet regarding what will happen if the deal doesn’t get approved:
In the event the transaction does not receive regulatory approval satisfactory to AT&T and the transaction does not close, AT&T will be required to pay a breakup fee of $3B, transfer to T-Mobile certain AWS spectrum that is not needed by AT&T for its initial LTE roll out, and provide a roaming agreement to T-Mobile on terms favorable to both parties.
So this seems like AT&T has a lot to lose, right? Wrong. In 2010 AT&T raked in over $19.8 billion in net income. It has a market cap of over $165 billion. It pulled in a hair under $35 billion in cash from its operations and then turned around and invested $21.4 billion and put another $15.8 in financing. Right now AT&T is sitting on a cash pile of $1.437 billion, and since it’s clearly able to pull in $35 billion in cash over the course of a year, you can bet your ass that it will easily have the $25 billion in 12 months. And that extra $14 billion in stock is a piece of cake. Whoever believes that AT&T will do anything but laugh at having to give away $3 billion is gravely mistaken.
Let’s look at T-Mobile’s financials real quick to compare (you might say that it is unfair to compare T-Mobile to AT&T instead of AT&T Mobility but it is AT&T that is purchasing T-Mobile, hence it is AT&T’s buying power versus T-Mobile’s operating costs, not Deutsche Telekom’s. If you’re really wondering, AT&T’s wireless segment pulled in $58.5 billion in operating revenues and $15.2 billion in income). T-Mobile had a whopping net income of $268 million. It’s operating expenses for 2010 were at $4.75 billion. Right now it is sitting on $109 million in cash. Should the deal fall through AT&T will pay over 63% of T-Mobile’s expenses for the next year, meaning T-Mobile will have around $5 billion of revenues (less the roughly $1.75 billion it will pay out of pocket for the rest of its expenses, so it will have $3.25 billion) to do with as it pleases. It sounds like T-Mobile is in a win-win situation if you ask me.