AT&T Has Few Weapons for Verizon Fight After T-Mobile Bid: Tech

December 20, 2011, 10:11 AM EST

By Scott Moritz

Dec. 20 (Bloomberg) — The collapse of ATT Inc.’s $39 billion bid for T-Mobile USA leaves the second-largest U.S. mobile carrier with few attractive strategic options as it seeks to challenge market leader Verizon Wireless.

To accommodate data-usage growth, ATT argued it needed the airwaves the T-Mobile USA purchase would have brought. With that option now unavailable, ATT can either seek to buy spectrum from another company, wait for the government to auction more frequencies or try to squeeze more capacity out of its current airwaves. Each option is time-consuming, expensive and risky, said Colby Synesael, a Cowen Co. analyst in New York.

“Without this deal, it is going to be difficult for ATT,” Synesael said. “There’s no clear solution.”

Already criticized for dropped calls and network coverage, ATT will face more constrained capacity than Verizon Wireless, Synesael said. That may hurt customer growth at a time when carriers are seeking to sign up lucrative smartphone and tablet subscribers who will generate revenue for years to come. Earlier this year, ATT lost U.S. exclusivity to the Apple Inc. iPhone.

While ATT focused on winning regulatory approval for the takeover, rivals negotiated their own airwave deals. That means several spectrum assets that would have still been available for ATT to purchase earlier this year are now off the market.

ATT abandoned the T-Mobile deal yesterday after a nine- month campaign that underestimated opposition from regulators. The Justice Department sued to block the deal in August, saying it would reduce competition. The purchase of T-Mobile from parent Deutsche Telekom AG would have vaulted Dallas-based ATT past Verizon Wireless as the biggest U.S. mobile carrier.

Wireless Airwaves

Spectrum is a term used for airwaves, licensed by the government, that carry wireless voice and data signals. Governments often sell unused or repurposed frequencies to the highest bidder, and companies also trade them.

Still, ATT can’t rely on the U.S. government auctioning new wireless spectrum soon. While lawmakers are working on legislation that would allow carriers to bid on airwaves currently held by television broadcasters, no timing for such a sale has been set.

That leaves ATT seeking spectrum holders willing to sell. However, any such attempts became more difficult in the past few weeks because purchases by rivals reduced the amount available.

Rivals’ Moves

On Dec. 1, wholesale wireless-service provider and spectrum-owner Clearwire Corp. secured its ties with partner Sprint Nextel Corp. through a financing and network-sharing agreement. Sprint, the No. 3 carrier, reserved rights to buy Clearwire’s spectrum if other offers were made.

That move was followed by Verizon Wireless’s $3.6 billion deal to acquire airwaves held mostly by Comcast Corp. and Time Warner Cable Inc., something Synesael called “a real coup.” Verizon Wireless, co-owned by Verizon Communications Inc. and Vodafone Group Plc, and the cable companies will also market and sell each other’s services under the agreement.

The deal, combined with one struck with Cox Communications Inc., means Verizon Wireless will have “the highest-quality and deepest 4G spectrum position among the major U.S. carriers,” John Hodulik, a UBS AG analyst, said in a research note. It will have 56 percent more 4G spectrum than ATT in the top 10 markets and 46 percent more in the top 100, giving it a “meaningful competitive advantage,” Hodulik said. ATT has 100.7 million subscribers, trailing Verizon Wireless’s 107.7 million.

Dish Network Corp., a satellite-TV provider that owns spectrum, said this month it isn’t interested in selling it and that it may partner with T-Mobile if ATT’s takeover bid fails.

Spending Through It

ATT fell 0.4 percent to $28.74 yesterday and has dropped 33 percent since a 2007 high. The stock has lost 2.2 percent this year, while Verizon Communications has gained 8 percent.

Among ATT’s other “very limited options” is an attempt to squeeze more performance out of its network, said Jennifer Fritzsche, an analyst at Wells Fargo Co. in Chicago. That investment would require building more cell-phone towers and adding more network equipment on the existing airwaves. That increases the number of antennas so more people are served through the same spectrum.

“With the lack of more spectrum, they can split cell sites and spend their way through it,” Fritzsche said.

That would require ATT to boost spending at a time when it also has to compensate Deutsche Telekom for the deal’s demise. Deutsche Telekom has said it values the breakup package at as much as $7 billion, including lower charges for its customers to terminate calls on ATT’s network. ATT said yesterday it took a $4 billion pretax charge for the deal’s failure.

The solution of adding network gear would also be a shorter-term solution and not solve the longer-term spectrum crunch, Fritzsche said.

Risk to Investors

Citing the potential for increased spending, Fitch Ratings issued a report last week pointing to the possible risks to investors.

“ATT’s need to enhance its capacity could lead to a rise in capital spending and/or the acquisition of spectrum through other transactions,” the credit-rating company said.

ATT had more than $70 billion of debt at the end of the third quarter and capital expenditures rose to $14.7 billion in the first nine months of the year, from $13.7 billion in the same period a year earlier.

While the T-Mobile acquisition would have also represented a large investment, the deal would have included benefits such as additional customers and revenue, a network and possible cost savings from combined operations and job cuts.

Kevin Smithen, a Macquarie Capital USA Inc. analyst who downgraded ATT to “sell” from “hold” last week on concern that the company has lost ground, said Verizon Wireless now has a spectrum advantage as customers move to faster networks.

“ATT is running out of options,” Smithen said in a note.

–Editors: Ville Heiskanen, Peter Elstrom

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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