1:40 AM New York – AT&T Inc agreed to acquire T-Mobile from Deutsche Telekom in a cash and stock transaction for $39 billion. The deal will catapult AT&T to the largest wireless carrier in the U.S. and customers may see higher prices in less than a year after the deal is completed. J.P. Morgan will provide $20 billion in short term funding.
AT&T Inc agreed to acquire T-Mobile USA in a cash and stock transaction that valued the second largest carrier for $39 billion.
The announced deal is the largest since 2004 when Sprint and Nextel Communication Inc merged in a $36 billion and has been one of the worst telecom deals ever.
The agreement is approved by the board of directors of both companies but will face a close scrutiny from the regulators in Washington, D.C.
AT&T is offering $25 billion in cash and may increase the cash portion by $4.2 billion with a corresponding decrease in stock component to maintain 5% equity stake of T-Mobile parent Deutsche Telekom in the company.
The deal faces several regulatory hurdles and if failed to win approval AT&T may have to hand over valuable spectrum to –Mobile USA and $3 billion as a part of a breakup fee.
The merger is expected to catapult AT&T as the largest carrier surpassing Verizon Wireless, the current market leader with 91.2 million subscribers.
Both carriers are using GSM network and is expected to be synergistic to AT&T and will consolidate several retail locations and lower the cost of acquiring new customers.
AT&T has 95.5 million subscribers and T-Mobile has 33.7 million subscribers.
AT&T in a press released estimated $3 billion annual rate in annual savings after three years of integration and excluding integration costs. The company also estimated total synergy to exceed the purchase price of $39 billion after several years.
However, consumers are likely to face higher prices as T-Mobile offers one of the cheapest monthly plans and AT&T is likely to offer higher priced contracts to the current T-Mobile customers.
FCC in the last few months issued revised guidelines for mergers in the telecom industry but the deal faces several regulatory hurdles. AT&T is hoping that the FCC will view the competition in the telecom markets at city-by-city level and not at the nation level and contends that at least top 20 markets has five or more competitors.
After the merger, Verizon and AT&T are likely to dominate the market followed by a smaller and struggling third player Sprint with 48 million subscribers and MetroPCS with 7.3 million subscribers.
U.S. Cellular, Leap Wirless and Centennial Communications collective have just over 12 million subscribers at the end of 2010.
The transaction is expected to be financed with the $20 billion in one-year unsecured loan from J.P. Morgan Chase.
After the merger, AT&T pro-forma annual revenues are expected to increase to $80 billion from $58.5 billion and the company estimated that cash flow will be strong enough to support the dividend.
AT&T was advised by Greenhill & Co., J.P. Morgan and Evercore Partners acted as financial advisors and Sullivan & Cromwell, Arnold & Porter and Crowell & Moring provided legal advice. Deutsche Telekom was advised by Morgan Stanley.
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