AT&T's Pitch for Free Mobile

Deflation has truly arrived: Big, profitable companies are going for free. That is, at least, what AT&T is claiming in relation to its T-Mobile USA acquisition from Deutsche Telekom. AT&T says the $39 billion cost of the deal is more than offset by the present-day value of synergies. What are those synergies? AT&T has estimated:

• An annual improvement in earnings before interest, taxes, depreciation and amortization of $3 billion, starting in the third year after the deal is completed. That comes from cost savings in areas like the companies' retail stores, advertising budgets, staffing and other administrative expenses.
• Improvements in average revenue per user. (T-Mobile contract users now generate $52 a month, well below AT&T's level of $62.57.)

AT&T says its synergies are achievable, but there have to be questions about revenue synergies. Many people are on T-Mobile because it offers lower prices—its price for an unlimited voice family package with two phones is $99.99 a month, compared with AT&T's $119.99. AT&T will try to persuade T-Mobile customers'to upgrade to pricier plans by offering them better phones. For some, that might be attractive. But there is likely to be a good chunk of T-Mobile's 26.3 million customers on contract who defect, either before the deal closes or in the year or two afterward, to other cheap providers.

Even if AT&T hits targets, the net present value of $3 billion in annual synergies, after deducting $7 billion of up-front integration costs and using an 8% discount rate, is only $16.3 billion. AT&T, in its $39 billion-plus synergy calculation, is including capital expenditures that won't have to be made as a result of the integration of the two companies' cell networks. In addition, it is counting wireless spectrum that won't have to be acquired by either company.

Unquestionably, the value of the deal is T-Mobile's spectrum, which will be particularly useful for AT&T as it rolls out the next generation of wireless technology, called LTE. So the deal has brought forward spending that would be necessary in the future. But whether AT&T really gets T-Mobile's existing cash flows for "free" is debatable. It depends on getting the deal through regulators without crippling concessions. And on holding on to T-Mobile's cost-conscious customers, while persuading some to pay more.