Can AT&T Really Walk Away From The FCC While Keeping The T-Mobile Deal Alive?

[Commentary] Given how incredibly unlikely AT&T is to win approval of its acquisition of T-Mobile at this point, why is AT&T drawing this out? Do they really think they can win in court? Why not just call it quits, or vow to fight it out before the Federal Communications Commission’s administrative law judge?

I think a number of things are going on here. First, AT&T was, once again, caught by surprise on the timing. FCC Chairman Julius Genachowski played this like a total master. He kept his cards close, counting on his reputation for avoiding political conflict with powerful entities like AT&T, then sprang it on them when Congress was out of town and AT&T could not pull together powerful political pushback. The announcement that the Chairman would do this on circulation, rather than wait 3 weeks for the December Public Meeting¸ further limited AT&T’s options.

Caught by surprise with very limited options, AT&T had two choices: 1) try to tough it out and lobby like hell to prevent a vote, or 2) try to pull the applications to avoid an hearing designation order (HDO). Between these two bad choices, AT&T probably made the right calculus. It seems extremely unlikely that AT&T could prevent a vote for the HDO. Neither Democrat is likely to undercut both the Chairman and the Department of Justice, even if he or she wanted to vote against it. Nor is it certain the FCC Commissioner Robert McDowell would vote against a designation for hearing. As I have observed before, Commissioner McDowell is not a corporate shill so much as a true believer in the Gods of the Marketplace. This is precisely the case where Commissioner McDowell might say: “Well, this is definitely the thing to do, refer to a hearing rather than leverage our authority to extort concessions. There are real questions about market power here, and they ought to be resolved by a hearing as required by law.” Heck, this kind of once-in-a-blue-moon vote is precisely the sort of thing that burnishes credentials as a genuine believer in the free market rather than simply pro-big business.

AT&T can still hope to renegotiate the breakup fee with Deutsche Telekom (DT) by stretching out the proceeding. If DT knows it can’t get the deal done, it will want to unwind as quickly as possible so it can maximize the value of T-Mo to another buyer, or as a standalone initial public offering (IPO). While one Wall St. analyst recently valued such an IPO at $28 billion, that will decline if T-Mobile remains shackled to the deal and continues to experience churn as a result. So AT&T may be content to have the case in abeyance before the district court. At this point, keeping the case open is the only leverage it has to renegotiate the breakup fee. If the case is in abeyance, AT&T can threaten to leave it that way until the breakup fee comes due in September 2012 unless DT agrees to renegotiate the fee downward.