By Thomas Gryta
Maybe T-Mobile USA Inc. was a big winner in the recently
completed government wireless auction after all--with AT&T Inc.
picking up the bill.
The record $45 billion in bids pushed up the market value of
"mid-band" spectrum, a category that includes the airwaves AT&T
turned over to rival T-Mobile in 2012 as part of the breakup fee
for their failed merger.
The breakup fee was one of the costliest ever. AT&T took a
$4 billion charge, covering the $3 billion in cash it paid T-Mobile
and the $1 billion book value of the spectrum it surrendered.
Today, the cost looks even worse in light of the higher estimated
values for mid-band spectrum. Communications consultant New Street
Research LLP estimates that same spectrum is worth $4.7 billion in
the wake of the auction, putting the opportunity cost of the failed
deal near a staggering $8 billion.
The T-Mobile acquisition was a rare misstep in a long history of
high stakes deal making at AT&T. And while it is in the
rearview mirror, its outcome helps explain the pressure on AT&T
and Chief Executive Randall Stephenson to get its next deal
right.
The $49 billion pending acquisition of DirecTV LLC doesn't face
the same regulatory threat as the deal with T-Mobile. But it will
expose AT&T much more deeply to pay-TV at a time when options
for cord-cutters are expanding rapidly.
It is in some ways a reflection of the problems companies face
when looking for a next deal after successfully rolling up their
industries. AT&T built itself up from a regional phone company
via a series of massive deals under former CEO Ed Whitacre. Now the
company is so big that those sorts of deals are off limits.
The DirecTV acquisition is AT&T's biggest since its $85
billion purchase of BellSouth in 2006. Some on Wall Street were in
disbelief when The Wall Street Journal first reported last spring a
deal was in the works. It made little strategic sense to buy a
company in an industry that had peaked. Many now see the benefits
of the deal, along with a boost to AT&T's cash flow, making it
easier for the company to cover its large dividend payment and
investment needs.
AT&T recently promised that postmerger cost savings will be
"measurably larger" than originally projected. Last May it said the
savings would exceed an annual rate of $1.6 billion by three years
after the deal closes, mostly coming from content costs related to
its television business.
The DirecTV deal will help diversify AT&T away from the U.S.
wireless business, where growth has slowed as market saturation and
competition take their toll. AT&T executives say the deal will
give it much needed scale in television, helping make its U-verse
business profitable, while providing leverage to offer new video
services over mobile devices
Along with smaller wireless acquisitions in Mexico, AT&T is
looking for a major transformation.
"Twelve months from now, AT&T's revenue mix is going to look
very different," Mr. Stephenson said in January.
Four years ago, however, AT&T was plowing ahead with a plan
to get bigger in consumer wireless via the $39 billion deal for
T-Mobile.
The failed combination gave T-Mobile fresh spectrum covering 121
million people, or about 39% of the U.S., according to regulatory
filings, as well as a long-term deal to roam on AT&T's
network.
AT&T had to go into the market to replenish its own
spectrum. In the auction that ended in January, it had winning bids
of $18.2 billion, the most of any participant. Rival Verizon
Communications Inc.'s bids totaled $10.4 billion.
Perhaps the worst development for AT&T was that the
reinvigorated T-Mobile became a vigorous competitor. T-Mobile is
far from being the hamstrung weakling described in the 2011
AT&T merger documents. It has used the cash and spectrum it got
from AT&T to upgrade its own network. Last year AT&T cut
prices for much of its customer base to help fend off the
attack.
AT&T appears to have learned some of the harder lessons from
that deal. This time it picked one that regulators probably can
live with. And this time, if the government objects, AT&T
doesn't have to pay a breakup fee.
Write to Thomas Gryta at thomas.gryta@wsj.com
Access Investor Kit for Deutsche Telekom AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=DE0005557508
Access Investor Kit for AT&T, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US00206R1023
Access Investor Kit for Deutsche Telekom AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2515661054
Access Investor Kit for DIRECTV
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US25490A3095
Subscribe to WSJ: http://online.wsj.com?mod=djnwires