Second Blow to AT&T/T-Mobile Merger

AT&T Inc.‘s (T - Analyst Report) proposed $39 billion purchase of Deutsche Telekom’s unit, T-Mobile USA, is facing another setback following opposition from the Federal Communications Commission (FCC).

Earlier in August, the Department of Justice blocked the proposed merger and filed an antitrust lawsuit with the U.S. District Court in Washington. The trial is expected to start on February 13. Now, the FCC is seeking to send the proposal to the administrative law judge for hearing, which is expected to start after the completion of the trial.

According to the FCC, the combination of the second and fourth wireless operators will create America’s largest mobile phone company surpassing the present leader, Verizon Wireless, a joint venture of  Verizon Communications Inc. (VZ - Analyst Report) and Vodafone Group Plc (VOD - Analyst Report). The deal could also mellow down innovation and investments in the industry and eventually affect customers.

Further, the proposed transaction would create a duopoly market for the U.S. wireless industry apart from flaring up prices and layoff issues.  It would also stifle competition and make AT&T and Verizon Wireless the only two dominant players in the industry, controlling almost 80% of the U.S. wireless post-paid market. Moreover, the FCC is not convinced with AT&T’s assertion that the transaction would result in the faster rollout of a high-speed 4G network.

The proposed AT&T/T-Mobile merger hearings remind us of the DirecTV Inc. (DTV - Analyst Report) and EchoStar Corp. (SATS - Snapshot Report) merger trials that hit headlines almost a decade ago. Finally, the EchoStar-DirecTV deal was called off.

The recent move by FCC has raised doubts about the consummation of the AT&T/T-Mobile merger.

In fact, even the third-largest U.S. wireless carrier Sprint Nextel Corp. (S - Analyst Report) has opposed to this merger. We see this as an obvious reaction as the combined company would be almost three times that of Sprint.

Furthermore, the effects of the merger on smaller and lower-cost wireless carriers like MetroPCS Communications Inc. (PCS - Analyst Report), United States Cellular Corporation (USM - Analyst Report) and Leap Wireless International Inc. (LEAP - Analyst Report) remain unclear. The combination might put pressure on these carriers to purchase more spectrums for future broadband networks. These companies will not be able to outbid bigger competitors in spectrum auctions and business partnerships as the merger would make deals and contracts more expensive.

AT&T seems disappointed by the FCC action. The telecom ace was looking to close the deal in the first quarter of 2012.

While we await the final decision on this much-hyped merger, we prefer to maintain our long-term Neutral recommendation on AT&T. The company retains the Zacks # 3 (Hold) Rank for the short term (1-3 months).

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