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AT&T-Mobile: What the analysts say

March 21, 2011: 11:18 AM ET

The acquisition deal announced on Sunday unleashed a flood of analyst's notes

Image: Engadget

With the fate of so many players at stake -- not just AT&T (T) and Deutsche Telekom (DT), but also Verizon (VZ), Sprint (S), Apple (AAPL), Research in Motion (RIMM), Hewlett Packard (HPQ), Nokia (NOK), Motorola (MOT) and the other makers of Google (GOOG) Android phones, not to mention all the companies that build cell towers -- everybody on Wall Street, it seems, had something to say. A sample of the analyst's reports:

Stifel Nicholaus' Rebecca Arbogast: You've got to give credit to AT&T for shaking things up. The latest wireless deal, between AT&T and T-Mobile (part of DT), doesn't lack for dramatic impact, but we believe the government's initial response will be measured. We don't expect the FCC chairman will declare it to be unthinkable as Reed Hundt did in immediate response to the rumored AT&T-SBC deal years ago. Rather we think it likely that DOJ and the FCC take a deep dive into the individual market analysis... We are confident AT&T would have worked through both the political calculus and the hard numbers before agreeing to a $3 billion break-up fee, and AT&T has a sterling record of getting deals approved by the government. But we do not expect they had "socialized" the merger with DOJ or the FCC in advance, and we believe there is a large measure of uncertainty necessarily inherent in the deal.

Morgan Stanley's Simon Flannery: It is the first sizeable deal for CEO Randall Stephenson since taking the helm of AT&T in June 2007. The deal was unexpected by most in the investment community given heightened regulatory scrutiny with the current Administration. Yet AT&T appears to be confident of a satisfactory FCC and DOJ approval (which it expects in 12 months) given the breakup fee: (1) $3B, (2) transfer to T-Mobile certain AWS spectrum that is not needed by AT&T for its initial LTE roll out and (3) provide a roaming agreement to T-Mobile on terms favorable to both.

Kaufman Bros.' Ben Abramovitz: We believe this announcement is a surprise to most, if not all investors, and we are even more surprised that regulators would consider allowing such a deal to occur while at the same time assume that both companies quietly ran this potential deal by regulators to see if it passes "the sniff test" before it was announced.

Wells Fargo's Jennifer Fritzsche: If approved, we view this deal as an extremely positive one for our top pick AT&T. T's biggest need has been spectrum. With this deal, T essentially increases its spectrum position by about 50%. Spectrum is a finite asset. If this deal is approved, AT&T has found an immediate fix for what has proven to be a large overhang on its wireless operations.

Merrill Lynch's David Barden: We expect a position reaction to AT&T removing a competitor, doing so for free net of synergies, or at worst sidelining a rival for an extended period. [For Verizon]: Strategically, the net of a stronger AT&T and a disappearing T-Mobile is positive. The knee-jerk reaction may be to fear a Sprint bid to counter AT&T's move (which we view as unlikely), which could weigh on shares.

Jeffries' Peter Misek: Sprint and Clearwire are now more likely to merge, in our opinion. A T-Mobile and Sprint merger would have had integration challenges due to their different network technologies. After the difficulties with the Nextel integration, Sprint was likely reluctant to enter into a comparable situation. The cheapest and fastest route for Sprint to have a nationwide 4G network would be via Clearwire, but we believe Sprint prefers LTE to Wimax due to longer-term compatibility and equipment sourcing/pricing concerns (LTE will likely be the dominant worldwide 4G technology). But Sprint would still like to leverage whatever value can be found in Clearwire, in our opinion. We note that despite a frosty relationship, recent public statements between the two companies have intimated a thawing.

J.P Morgan's Philip Cusick: AT&T has ~10,000 towers and 57,000 cell sites and T-Mobile USA has ~6,000 towers and 49,000 cell sites today, of which 31,000 are 3G. Given comments in the press release Sunday about improved cell density and LTE coverage expansion to 95% of Americans, AT&T could go from a net builder of cell sites to a net reducer of cell sites in the next 5 years.

Oppenheimer's Ittai Kidron: If AT&T closes T-Mobile, Verizon could also look to increase its scale (including a possible run at Sprint) and improve its own purchasing power. In general, we view carrier consolidation and the increased buying power it represents as negative for wireless device vendors (especially Samsung, HTC and LG given exposure to T-Mobile and Sprint) and infrastructure suppliers (such as Ericsson, Alcatel-Lucent, Nokia-Siemens). However, Apple and Motorola Mobility could be in a position to gain incrementally as both OEMs are better positioned at AT&T vs. T-Mobile.

Stifel Nicholaus' Doug Reid: We view AT&T's acquisition of T-Mobile as a minor positive for Apple, as the deal gives us increased confidence that iPhone and iPad will be made available to the customer base of T-Mobile USA in 2012, an assumption already reflected in our Apple estimates. Additionally, we view the AT&T-T-Mobile USA deal as a minor negative for handset makers in our coverage (RIMM; NOK; MMI) as we expect consolidation from four large national operators in the U.S. (Verizon, AT&T, Sprint, and T-Mobile) into three (Verizon, AT&T, and Sprint) to reduce the number of distribution channels for Android, Windows Phone, BlackBerry, and Nokia devices. We expect AT&T's increased buying power to further pressure pricing and gross margins for handset vendors as the broader U.S. market opportunity for device differentiation is reduced.

Baird's William Power: AT&T's acquisition of T-Mobile USA is clearly a case of perceived strategic merit trumping valuation. The acquisition should improve the wireless competitive profile by eliminating one carrier and provides T with significant synergy opportunities over time... While the transaction should benefit the industry over time, and by extension AT&T, T is paying a steep price for a company already losing postpay subscribers. With Verizon gaining the iPhone, the road wasn't going to get easier for T-Mobile.

Barclay's James Ratcliffe: The deal (a) makes operational sense (both are GSM carriers, so network integration is relatively straightforward), with $3BN in annual synergies conservative, in our view, (b) gives T an industry-leading spectrum footprint (135Mhz on average, >100Mhz in 87% of footprint, vs. 88Mhz and 23% for VZ), and (c) improves the long-term market pricing dynamic. Regulatory approval is doable, in our view, but certainly not easy.

Citgroup's Michael Rollins: We believe the surprise announcement for AT&T to buy T-Mobile USA for $39 bil. has the potential to increase T's own operating scale, provide some needed wireless consolidation, & provide greater breathing room for the telecom sector to grow revenue over the next few years to the extent T & DT can get regulatory approval to combine the #2 & #4 wireless carriers. We are upgrading AT&T to a Buy rtg (revised $33 target price) & now believe T can outperform Verizon on a 3-month view, given the asymmetrical upside potential if T can complete the merger. We are upgrading Leap as a possible beneficiary.

Cowan's Colby Synesael: The boards from both companies have approved the deal, which is expected to close in 12 months. While we view the potential for reduced pricing competition as positive for the industry, and cost synergies and an increased relationship with DT as positive for AT&T specifically, the true outcome of the merger remains unknown considering the significant regulatory scrutiny such a deal will withstand, including whether it even gets approved, and if so, the impact of divestitures. Thus we believe it is prudent to maintain our Neutral rating.

Deutsche Bank's Brett Feldman: Since Bloomberg first reported on 3/8 that Sprint and T-Mobile were in merger discussions, Sprint has gained 12.7% vs. a decline of 2.4% in the S&P 500. Now, with the AT&T/T-Mobile deal, Sprint will likely remain in a distant #3 position, even if it were to acquire all remaining regional and emerging carriers. While this reality may pressure the stock near-term, we reiterate our BUY rating and $7 price target for 2 reasons: (1) our valuation analysis does not factor in potential synergies from acquiring T-Mobile (or anyone else) and (2) our long-term estimates could potentially increase due to the broader benefits of industry consolidation such as better pricing and higher market share.

Gleacher's Stephen Patel: AT&T's agreement with T-Mobile could changeĀ  U.S. smartphone industry dynamics if the deal is approved. The combined entity's greater customer reach (130mil subs) and purchasing power could enable a more balanced market share for multiple ecosystems and make it less likely the U.S. evolves into a 2-ecosystem only market (Android/iOS). We view this as positive for the #3 and #4 ecosystems, Blackberry and Windows Phone. We could also see reduced pricing power long-term for some vendors, particularly those without differentiated experiences.

Goldman Sachs' Scott Goldman: As part of its $39 bn planned agreement to acquire T-Mobile USA, AT&T is committing to significantly expand its 4G LTE coverage. Previous plans included intentions to cover roughly 80% of the US. Under the proposed merger, AT&T intends to deploy to 95% of the US population, or 46.5 mn incremental pops. The increased coverage is expected to primarily target rural markets.

Hudson Square's Todd Rethemeier: The deal makes sense for several reasons: 1) both use GSM technology, making integration easier, 2) the combined spectrum licenses would allow for more robust 4G network deployment, 3) the acquisition multiple, 7.25x 2011E EBITDA, isn't out of line with other wireless acquisitions, and 4) we believe the deal is almost neutral to free cash flow per share, even before synergies. However, we are very concerned about the deal's prospects with regulators in Washington, DC. The combined companies would have 43% market share overall, and 44% of the postpaid market. More importantly, it would reduce the number of postpaid competitors from 4 to 3 in most markets.

Macquarie's Kevin Smithen: The acquisition would quickly consolidate a competitive US wireless market and create the largest US carrier and the fourth-largest global carrier with 136m subs behind China Mobile, Vodafone and China Unicom. Although long-term potential cost synergies and strategic rational make sense, we believe the deal will face significant regulatory scrutiny given the combined entity will represent ~43% of the market. We expect shares of AT&T to trade down 3-4% due to merger dilution and would recommend accumulating shares below the $26 level to capture longer-term upside potential.

Collin Stewart's Greg Miller: With the release of the FCC authored US Mobile Wireless Competition report in May of 2010, the agency effectively labeled the state of competition in the US Wireless market place as declining. However, the agency has separately noted the need for carriers to have additional spectrum as well as the need to serve rural areas with wireless broadband. A combination of AT&T and T-Mobile USA that would create a near nationwide AWS foot print with 20 Mhz of spectrum capable of delivering LTE based 4G capabilities to much of rural America that would not otherwise see it. We expect fairly significant divestitures of spectrum and customers in order to close the proposed deal but think the deal can close.

Piper Jaffray's Christopher Larsen: Although there are clear benefits from the merger for the other carriers, AT&T should become a more formidable competitor. First, all of the carriers have been feeding off of T-Mobile's subscriber base due to its lack of differentiated service. AT&T's market position and reputation should help stem subscriber defections over the long-term (there could be some losses early due to merger-related distractions or forced divestitures). Second, the combination should allow AT&T to accelerate its 4G network build. Finally, AT&T's new spectrum position gives it an opportunity to build the premier wireless network in the nation, as it relates to quality and capacity.

Morgan Stanley's Timothy Horan: In our view, T and T-Mobile would not have closed on a deal without first checking with the FCC/White House on the probability of approval. There are multiple points the companies will emphasize to successfully close the deal, including:

  1. T is buying a German company's US holding
  2. No new spectrum will be available for five years, so T-Mobile would continue to be a weak competitor while all its competitors would be rolling out 4G services
  3. The T-Mobile workforce is also unionized, which would make the acquisition particularly palatable for a Democratic administration.
  4. As T is one of the exclusive iPhone carriers, this would open up the device to T-Mobile's customer base.
  5. Notably, this would allow a mass deployment of 4G. T believes with this transaction an additional 45M POPs in the US can be penetrated with 4G services.
  6. Industry is currently price competitive, with five major carriers competing in most major markets.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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