March 19-25: Is There Anything Else to Talk About?
Our Headlines have been dominated all week by AT&T's proposal to buy T-Mobile USA for $39 billion -- so much so, you may ask, Is there really anything else to write about it? Not to be too redundant, here's a look at what we've been reading this past week. Ryan Chittum at the Columbia Journalism Review noted that early coverage of this deal has done a good job of emphasizing:
- the bold consolidation the deal would entail,
- a very distinct impression that this deal could be bad news for consumers, and
- a bold test of just how weak antitrust enforcement has really gotten in the US.
AT&T and Deutsche Telekom announced the deal on March 20 just ahead of the US wireless industry's annual confab in Florida. AT&T would gain T-Mobile's 34 million wireless subscribers, network infrastructure and spectrum licenses (AT&T would increase its spectrum holdings by almost 60 percent.). Deutsche Telekom will get an approximately 8 percent (but no less than 5 percent) ownership interest in AT&T -- and a seat on AT&T's board. Here's the benefits the companies are promising from the deal.
1. A fast, efficient and certain solution to AT&T's impending exhaustion of wireless spectrum in some markets.
The Washington Post's Cecilia Kang wrote a smart piece on March 22 noting that this deal isn't about merging two telephone companies: "It's about building a bigger mobile network for accessing the Internet." She writes that many of the features of traditional mobile phone service are now available as free applications (think Skype) and, increasingly, "the biggest game in town is mobile Web access."
An interesting, contrarian view comes from research firm SNL Kagan which posits that the deal is more about scale than spectrum for AT&T. Kagan believes AT&T is trying to improve operational efficiencies and wireless fiscal performance. T-Mobile's spectrum holdings, Kagan observes, are in the less valuable higher frequencies of 1.8GHz or higher.
2. Deployment of AT&T's next generation wireless service to 95 percent of the U.S. population to reach an additional 46.5 million Americans beyond current plans.
In pitching the deal this week, AT&T cited this benefit as matching the goals set forth by President Barack Obama and the National Broadband Plan. But industry analyst Dave Burstein points out that the US is on track to have 94% LTE coverage in 2013-2014. Verizon alone is committed to 92%. Since Verizon and other companies plan to continue deploying after that, it's almost certain the US in 2016 will be at 96%-98% without any government subsidy or merger approval.
3. Improved service for AT&T and T-Mobile customers.
The Financial Times reports that T-Mobile USA’s spectrum is particularly suitable for improving mobile services in urban areas, where the company has its highest concentrations of iPhone customers.
4. Spectrum efficiency, increasing capacity and output which is "the best way to ensure competitive prices and services".
Competition will be a major theme for both proponents and opponents of the deal. If regulators let the deal go through, AT&T (42 percent) and Verizon (31 percent) would control 73 percent of the nation’s cellphone market. Sprint, which lost $3.5 billion last year, would be a distant third place with about 16 percent. But it is hard to think of beleaguered Sprint as much of a competitor as it has racked up billions in annual losses over the past few years. Sprint's revenue has tumbled 20 percent from four years ago and its stock is down 84 percent from 2006. Effectively, you'll now have a two-company market, plus one company waiting to be sold off for its assets. It is hard to imagine that that won't result in higher prices for consumers.
5. $8 billion in AT&T infrastructure investment over seven years.
In January 2010, AT&T announced it would spend $18 billion to $19 billion on to improve wireless broadband service, spending twice as much on the wireless network as it did in 2009. AT&T's network is often maligned with complaints centered on service in New York City and San Francisco where use of iPhones is high.
In AT&T's conference call with analysts to pitch this deal, however, Chief Financial Officer Richard G. Lindner said the merger would allow AT&T to reduce future capital outlays.
6. An impressive workforce that taps into the knowledge and experience of both companies' employees.
As the US struggles to recover from the recession and lower unemployment rates, the potential loss of jobs will be a major part of the debate around the deal. The Communications Workers of America are early supporters of the deal. AT&T is the only national carrier with a unionized workforce and CWA sees the deal as a way of adding T-Mobile workers to the union. But public interest groups are concerned that the deal could mean thousands of layoffs.
"There will be hundreds, or even more, of empty storefronts in malls all over the country, and a lot of customer service representatives will lose their jobs," said Andrew Schwartzman, senior vice president and policy director at the Media Access Project.
Public Knowledge legal director Harold Feld predicted that "redundant" staff will get pink slips: "Outlet stores and customer service centers will be consolidated, as will work crews that maintain the networks. I do not know the precise numbers, but I would expect, based on previous mergers, that it will result in the loss of thousands of jobs."
7. Value for shareholders.
The deal will increases AT&T's total wireless revenues from $58.5 billion to $80 billion -- approximately 80 percent of AT&T's total revenues. AT&T has become more and more reliant on wireless revenues over the past few years. In 2008, Craig E. Moffett, an analyst with Sanford C. Bernstein & Company http://www.nytimes.com/2008/04/23/business/23phone.html?_r=1, told clients that he was concerned that the accelerating loss in AT&T's wireline business could destabilize the company, despite the growth in cellphone profit. “More than ever, wireless is AT&T’s engine,” Moffett wrote, “but wireline is its anchor. In 2009, GigaOm's Stacey Higginbotham http://gigaom.com/2009/05/07/wireless-scorecard-we-heart-data-edition/ noted that while overall subscriber growth at wireless carriers was staying pretty stable, wireless data revenue continued to climb. She pointed then at AT&T’s reliance on the iPhone. Back then, AT&T offered the iPhone exclusively. Just this past year, Verizon started offering iPhone services as well.
Bloomberg notes that AT&T is so determined to surpass Verizon Wireless that it’s willing to pay double its own valuation for the only US wireless operator losing customers. In T-Mobile USA, AT&T is getting a business that reported profit declines in four of the past five years as it trailed US rivals in building out a third-generation mobile network and missed out on sales of the iPhone. About 56,000 customers abandoned T-Mobile last year, while Verizon Wireless, AT&T and Sprint all boosted their subscriber counts. The $39 billion price tag is 28.8 times T-Mobile USA’s net income of $1.35 billion last year, according to data compiled by Bloomberg. T-Mobile USA’s earnings slipped 7.9 percent in 2010 as sales declined for a second straight year. The valuation was 121 percent higher than AT&T’s price- earnings ratio, 77 percent greater than Verizon and 5.3 percent pricier than Deutsche Telekom, data compiled by Bloomberg show. It’s also more than twice the median valuation of 11.9 times profit as of last week for 32 global cellular phone companies with market capitalizations of more than $1 billion, excluding those in Hong Kong or China. The purchase price represented a multiple of 7.1 times 2010 T-Mobile USA’s adjusted earnings before interest, taxes, depreciation and amortization, Deutsche Telekom said. That’s lower than the median Ebitda multiple of 9.3 for global telecommunications takeovers of more than $1 billion in the past five years.
8. Enhanced margin and long-term revenue growth potential.
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. The cost-cutting opportunities will be great, but they point to the labor concerns noted above.
The Wall Street Journal also notes AT&T's hoped-for 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's wireless margins are approximately 40% while T-Mobile's are just under 30%. AT&T also sees prospects for reducing T-Mobile's churn—the level of customers who switch out every year.
Tthere 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 says its synergies are achievable. It is offering to grandfather in T-Mobile customers' existing contracts, it will try to persuade them 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. Others might refuse to pay more. That would make it hard for AT&T to lift revenue per user as much as it wants to.
Although Deutsche Telekom CEO René Obermann and AT&T's Chairman and CEO Randall Stephenson are already meeting with officials at the Federal Communications Commission and making a public pitch to sell the deal, the paperwork needed to initiate the regulatory review of the deal will likely be filed in May. The FCC, the Department of Justice and the California Public Utilities Commission will be examining the deal. To follow the debate, keep reading Benton's Headlines. We've got all the coverage here or here for your RSS reader.