In the strongest sign yet that the AT&T/T-Mobile deal is unraveling, the companies issued a surprise Thanksgiving announcement that they have withdrawn their application to the Federal Communications Commission for approval of the $39 billion wireless mega-marriage.
But the companies aren’t throwing in the towel just yet.
Making what critics describe as a shrewd tactical move, the companies said in a statement that they will continue to pursue the sale of T-Mobile’s wireless assets to AT&T by focusing on winning approval from the Department of Justice — either at trial or through settlement.
Are they bluffing or simply hedging their bets?
Only time can tell.
AT&T, which until now has exuded confidence in the deal’s prospects, made its first public concession that its massive campaign to secure approval could end in defeat. It said it’s taking a $4 billion charge to cover a “breakup fee” it negotiated upfront with T-Mobile’s parent company, Deutsche Telekom “in the event the transaction does not receive regulatory approval.”
Supporters of the deal said this could open the door for more serious settlement talks.
“This is a smart move by AT&T/T-Mobile that will hopefully place emphasis on reaching a settlement that assures the benefits of the deal while addressing the challenges,” Dean Garfield, president and CEO of The Information Technology Industry Council, told POLITICO Thursday. The trade group had backed the deal in the hopes it would spur more wireless broadband.
AT&T and Deustche Telekom said in a statement that they took the action after FCC staff said Tuesday that Chairman Julius Genachowski would seek to block the wireless megadeal by designating it for an administrative hearing. Commission staff told reporters Wednesday that they believed the pairing of the nation’s second- and fourth-largest wireless carriers would reduce competition in the wireless market. They also said it wouldn’t produce the benefits for consumers in terms of jobs and expansion of wireless broadband.
AT&T and Deutsche Telekom said they electronically withdrew the application with the FCC on Wednesday.
The move was the first crack in the veneer of a deal that was announced in March with great fanfare and promise.
AT&T set about waging an intensive campaign through advertisements and lobbying to convince the public, state and federal regulators, unions and members of Congress that the pairing with T-Mobile would help fuel the sputtering U.S. economy. The company said the deal would add up to 96,000 jobs to the economy and help fulfill President Barack Obama’s goal of spreading broadband Internet services to all corners of the nation.
While lawmakers weighed in on both sides of the deal, the first sign that the Obama administration would fight approval came in August, when the Justice Department filed suit in U.S. District Court to block the transaction. But the companies vowed to fight back while keeping the prospect of a possible settlement open.
On Thursday, some of the public interest groups that opposed the deal called on AT&T to back away from the deal entirely.
They added that AT&T’s move was more of a tactical legal maneuver, as it would prevent the FCC from making public its research showing the deal is not in the public interest.
“Withdrawal of the FCC applications should be seen for what it is: a concession that the deal would create a duopoly in the national wireless market that will result in higher prices and reduced choice in handsets,” Andrew Jay Schwartzman, of the Media Access Project, said in a statement. “AT&T was unable to show that it actually needs T-Mobile's assets to build out high-speed broadband.”
AT&T's move will also prevent the FCC from sharing the judge presiding over the DOJ case from seeing the FCC’s conclusions, the groups argued. Gigi Sohn, president and co-founder of Public Knowledge, said in a statement, “Those findings would be the subject of the large and complex administrative hearing and process that AT&T would still need to survive in order to complete the $39 billion transaction.”
"We hope that AT&T would similarly withdraw its application from the Justice Department and end this charade once and for all," she added.
But the companies left the door open to explore further avenues for achieving their goals.
The companies “are continuing to pursue the sale of Deutsche Telekom’s U.S. wireless assets to AT&T and are taking this step to facilitate the consideration of all options at the FCC and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice either through the litigation pending before the United States District Court for the District of Columbia.”
The statement also said that they intend to refile with the FCC “as soon as practical.”
AT&T’s pretax accounting charge represents the $3 billion cash and $1 billion book value of spectrum that the company pledged in breakup fees due to Deutsche Telekom if the transaction fails to receive regulatory approval.
Analysts viewed AT&T’s move as a concession and said the fate of the deal was still likely to remain unresolved through February, when Justice’s case to block the deal is set to go to trial.
The move means the companies can now focus all of their efforts on the upcoming trial with DOJ and continue to push for a settlement, Robin Bienenstock, senior analyst at Bernstein Research, wrote in a note to clients on Thursday. But the prospect of settling or winning in court seems unlikely.
"Even if they were to prevail via either of these avenues, however, they would then have to renew their application at the FCC," Bienenstock said. While a modified deal structure could be found acceptable by the DOJ and could help the deal's chances at the FCC, it is unclear how quickly a refiled application would be reviewed by the FCC.
"All in all, we view this as a step toward concession," Bienenstock said. "Still, it suggests that the process will likely continue at least through the February trial."
Timing the announcement to Thanksgiving was a shrewd move because U.S. markets are closed, and Black Friday is generally a slow trading day, said Justin Serafini, a vice president at Height Analytics, another research firm.
He was pessimistic about the deal’s fate.
“Obviously, the merger is off,” he said.
“One alternative that has been suggested is that instead AT&T buys T-Mobile’s spectrum and network and lets T-Mobile essentially remain an independent operator that leases its network from AT&T,” Serafini added. “Presumably, Deutsche Telekom would continue to own T-Mobile or would sell it to a private equity firm or IPO it. In theory, T-Mobile would still remain independent and have its own pricing authority, while AT&T would get the spectrum from T-Mobile it really needs.”
Sprint, a leading opponent of the deal, declined to comment Thursday.
Kim Hart and Michelle Quinn contributed to this report.
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