AT&T to Buy T-Mobile USA for $39 Billion
By ANDREW ROSS SORKIN, MICHAEL J. DE LA MERCED and JENNA WORTHAM

12:16 a.m. | Updated
AT&T announced on Sunday that it had agreed to buy T-Mobile USA from Deutsche Telekom for $39 billion, in a deal that would create the largest carrier in the nation and promised to reshape the industry.

The transaction — one of the largest since the onset of the financial crisis — is expected to start a fierce battle in Washington as regulators scrutinize the impact of the deal on competition and consumers. The deal would leave just three major cellular companies in the country: AT&T, Verizon and the much smaller Sprint Nextel.

Some critics denounced the merger within hours of its announcement, saying it would most likely lead to higher prices. T-Mobile had offered some of the lowest rates in the country, keeping pressure on competitors. While AT&T is expected to honor current contracts, T-Mobile customers may have to pay higher rates once those contracts expire.

Still, AT&T pointed on Sunday to a recent report from the federal Government Accountability Office that said cellular subscription costs fell 50 percent from 1999 and 2009, a period in which the industry has consolidated.

“Consumers have borne the brunt of the increasingly concentrated market for mobile phone service,” Senator Herb Kohl, the Wisconsin Democrat who heads the subcommittee on antitrust, competition policy and consumers rights, said in a statement. “The explosion of cellphone usage — especially smartphones — makes competition in this market more important than ever as a check on prices, consumer choice and service.”

AT&T customers, though, could benefit in one notable area: service. Both AT&T and T-Mobile operate on the same technology, known as GSM, so the combination should provide better coverage. That has been a sore point for AT&T, which has been ridiculed over dropped calls and slow data services, especially on Apple’s iPhone.

“The carriers’ network technology fits nicely together so AT&T could redeploy some of T-Mobile’s spectrum in short order, helping relieve some of the pressures on its network,” said Craig Moffett, an analyst with Sanford C. Bernstein.

The acquisition would give AT&T additional leverage against its main rival, Verizon. The newly combined company — bringing together AT&T’s 95.5 million wireless subscribers with T-Mobile’s 33.7 million customers — would account for roughly 42 percent of all wireless subscribers in the United States. Verizon has around 31 percent, said Charles Golvin, a telecom analyst at Forrester Research. T-Mobile customers would have the option to buy an iPhone, helping AT&T combat the migration of the popular device to Verizon.

The deal would also provide significant cost savings, roughly $3 billion a year for the new company. Those savings, however, could have a huge effect on both the local and national economy, from real estate to media. The combined company is expected to close hundreds of retail outlets in areas where they overlap, as well as eliminate overlapping back office, technical and call center staff. It may also slash advertising spending. Last year, AT&T and T-Mobile spent $2.7 billion combined on advertising, according to Kantar Media.

“From AT&T’s perspective, this is a huge win,” said Chetan Sharma, an independent wireless analyst. “It’s about being No. 1 and having economy of scale.”

Scale will be critical as AT&T continues its aggressive rollout of the next generation wireless network, known as 4G. The carrier has been slower than rivals to deploy the 4G technology, LTE, than competitors. T-Mobile does not have a 4G technology in place.

Meanwhile, Verizon has already started to sell LTE-enabled devices. At the Consumer Electronics Show in January, Verizon announced at least a dozen new smartphones and tablet computers that will be compatible with the technology.

Deutsche Telekom had been weighing options for T-Mobile for more than a year. It had considered an initial public offering for the company, but shelved the plans. More recently, Deutsche Telekom had held talks about selling the unit to Sprint.

The discussions with AT&T — which started in earnest back in December of 2010 — heated up in recent weeks, amid renewed speculation about a Sprint and T-Mobile tie-up, according to people involved in the transaction.

To keep word of the deal from leaking, the AT&T team devised a complicated list of code names, known as “Project Auto.” AT&T was called “Tesla”; Deutsche Telekom was “Daimler” and T-Mobile was “Mercury.” When asked why T-Mobile was named Mercury — not exactly known for high-performance vehicles — Randall Stephenson, the chief executive of AT&T, chuckled: “We needed an ‘M.’ Nothing more.”

Under the terms of the deal, AT&T will pay $25 billion in cash and the rest in stock. Deutsche Telekom will gain an 8 percent stake in AT&T and a seat on the telecom giant’s board.

At $39 billion, AT&T would be paying a significant premium to most analysts’ estimates for T-Mobile. Bank of America Merrill Lynch valued the subsidiary in December at about $23.2 billion, while a team from JPMorgan Cazenove valued it at about $25.5 billion.

The deal is expected to be a boon for Wall Street with more than half a dozen firms collecting hundreds of millions of dollars in fees.

The deal requires approval from both the Justice Department and the Federal Communications Commission. It is unclear how regulators will react, but the companies clearly know the deal faces serious regulatory hurdles. Deutsche Telekom was so worried that the transaction would not be approved that it pushed AT&T to agree to a big breakup fee and spectrum as a form of insurance, according to people involved in the deal. The breakup fee in the deal is $3 billion, nearly 8 percent of the deal’s deal value. Typically, such fees are around 5 percent of the value.

Unlike the merger of Comcast and NBC Universal, which consolidated a transmission company and a content provider, the proposed AT&T and T-Mobile deal is a “horizontal merger” that would combine two companies that had been direct competitors.

As part of their assessment, antitrust lawyers must determine whether the deal might undermine efforts to encourage broadband service competition between wireless and landline providers. AT&T and Verizon both control a major segment of the landline market, so by allowing them to dominate wireless services as well, the merger could effectively hurt competition for broadband delivery options.

Mr. Stephenson of AT&T expects the deal to be completed. “When you get to the facts this is a deal that gets approved,” he said, adding that “on the local level, you have a choice of five or more providers.” In some cities, T-Mobile does not rank among the top carriers. For example, Metro PCS has more customers than T-Mobile in Miami, San Francisco and Detroit.

Still, some critics were not convinced.

“AT&T is already a giant in the wireless marketplace, where customers routinely complain about hidden charges and other anticonsumer practices,” said Parul P. Desai, policy counsel for Consumers Union. “From a consumer’s perspective, it’s difficult to come up with any justification or benefits from letting AT&T swallow up one of its few major competitors.”