Is AT&T/T-Mobile Merger Going Sour?

The proposed $39 billion merger of AT&T Inc. (T - Analyst Report) and T-Mobile USA seems unlikely. AT&T plans to take a $4 billion charge in the fourth quarter against its takeover, showing increased chances of failure rather than success.

Previously, upon the announcement of the merger deal in March, AT&T agreed to pay T-Mobile $3 billion in cash and $1 billion for spectrum access, should the deal fail.

The proposed transaction is also regulatory attack. First the Department of Justice (DoJ) and more recently the Federal Communications Commission (FCC) blocked the proposed takeover citing concerns of unfair competition, layoffs, higher prices, lower innovation and investments in the industry.

Nevertheless, AT&T was keen to bring T-Mobile under its fold in a deal that would to be the largest in the wireless industry since 2004. The second largest mobile phone company would continue to pursue antitrust approval from the DoJ but withdrew its application from the FCC. Notably, the FCC approval would be absurd should DoJ block the transaction.

The company is seeking to shed some assets or spectrums to rival companies in order to salvage its ambitious $39 billion purchase. AT&T would now divest a significantly large portion of assets than previously expected. Though the exact amount of disposal is not determined, it could be as much as 40% of T-Mobile assets, according to Bloomberg. AT&T could bring its asset sale proposal in the DoJ hearing on November 30.

AT&T affirmed that the sale of assets would minimize the merger concerns, helping it to gain necessary approvals. Divesture talks with several U.S. wireless carriers such as MetroPCS Communications Inc. (PCS - Analyst Report), Leap Wireless International Inc. (LEAP - Analyst Report), CenturyLink Inc. (CTL - Analyst Report), Dish Network Corp. (DISH - Analyst Report) and Sprint Nextel Corp. (S - Analyst Report) are in preliminary stages. Even if AT&T disposes assets to its rivals, it may still not be able to win the DoJ nod.

Ironically, the collapse of the deal might weigh on the smaller U.S. wireless rivals as they run the risk of losing opportunities to buy T-Mobile assets. The failure of the deal might turn T-Mobile into a more hostile competitor for urban prepaid users. T-Mobile, which is the fourth largest wireless carrier, is struggling to compete against Verizon Communications Inc. (VZ - Analyst Report), AT&T and Sprint Nextel Corp. (S - Analyst Report). The company is badly in need for additional spectrum to build the fourth-generation (4G) network, the demand for which is currently rapidly increasing.

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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