* Deal terms: $25 bln cash; D.Telekom gets 8 pct of AT&T
* AT&T agrees to large breakup fee: $3 bln cash, spectrum
* AT&T sees over $40 bln savings starting from third year
* D.Telekom sees large share buyback, debt payment-source
* Deal values T-Mobile at $1,147 per subscriber
By Sinead Carew and Nicola Leske
NEW YORK/FRANKFURT, March 20 AT&T Inc
plans to pay $39 billion for Deutsche Telekom AG's
T-Mobile USA to create a new U.S. mobile market leader, but the
pricey purchase is likely to attract intense antitrust scrutiny
over potentially higher customer bills.
The deal gives AT&T, the No. 2 US mobile service often
criticized for its poor network performance, additional capacity
to expand and meet ever increasing demands for videos and data
from devices such as Apple Inc's iPhone.
For Deutsche Telekom, the deal offloads an asset
that was declining in profitability and provides it with funds
to pay down debt and buy back shares. The German telecom
operator also gets an 8 percent stake in AT&T as part of the
deal, becoming its largest shareholder and retaining some
exposure to the U.S. market.
The deal leaves smaller rivals like Sprint Nextel
scrambling to figure out their next step. Sprint also held talks
to merge with T-Mobile, the No. 4 U.S. mobile service.
Sprint complained that the deal would dramatically alter the
wireless industry, which it said would be "dominated
overwhelmingly" by two companies that have almost 80 percent of
U.S. wireless contract customers.
But the world's largest M&A deal so far this year could run
into trouble with U.S. antitrust officials who fear that fewer
wireless players could drive up prices for consumers. T-Mobile
USA now offers some of the lowest wireless services rates.
The deal will add 34 million customers to AT&T's current 96
million, giving it a combined marketshare of an estimated 43
percent from 32 percent, putting it well ahead of Verizon
Wireless' 34.5 percent share.
"It's just nuts," said David Balto, an antitrust attorney
and a former policy director at the Federal Trade Commission.
"When you look at healthy and unhealthy markets, this is at the
top of the list of unhealthy markets."
One analyst pointed out that the two top U.S. operators -- a
larger AT&T and Verizon Wireless -- will account for nearly
three out of four mobile subscribers after this deal, which
could lead to higher bills.
U.S. Senator Herb Kohl, chairman of the Senate Antitrust,
Competition Policy and Consumer Rights Subcommittee, said his
panel will take a close look at what a "loss of competition will
mean for people who increasingly rely on wireless phone service
to connect to friends, family and the Internet."
"Consumers have borne the brunt of the increasingly
concentrated market for mobile phone service," Kohl said.
AT&T, however, is betting big that the deal will be
approved. It has agreed to pay an unusually high breakup fee of
$3 billion and to give T-Mobile USA wireless airwaves if
regulators reject it.
AT&T said it expected regulators to require it to sell some
assets as a condition of approving the deal, which it hopes to
complete in 12 months.
AT&T Chief Executive Randall Stephenson told reporters on a
conference call on Sunday that AT&T had done its "homework" on
the regulatory front and boasted that the deal could generate
savings of more than $40 billion.
"This is a unique opportunity." said Stephenson. "It's rare
you have a transaction where the synergies are greater than the
The companies have been talking for months according to
sources familiar with the situation.
Stephenson reached out to Deutsche Telekom CEO Rene Obermann
in December, according to one source, who said he drove the
process from the AT&T side.
The substance of the deal came together over the last month,
and the companies had a handshake agreement a week ago, the
Deutsche Telekom looked at different options, including an
IPO and a deal with Sprint Nextel before settling on the AT&T
deal, a second source said. A Sprint, T-Mobile deal would have
been difficult as they use different technology.
The transaction, which is Stephenson's first big acquisition
since he took over as CEO, will give AT&T much needed spectrum,
or wireless airwaves, to provide the capability to support
surges in the delivery of video, games and entertainment to
smartphone and mobile devices.
Stephenson said the company had to "think differently" to
address an expected eight-to-tenfold increase in demand for
wireless network capacity in the next five years.
Stephenson is paying a steep price for the deal. The deal
values each subscriber at $1,147. At that valuation, Sprint
would be worth $57 billion, almost four times its current value.
The purchase price includes a cash payment of $25 billion
with the balance to be paid using AT&T stock. AT&T has the right
to pay more cash as part of the purchase price by up to $4.2
As part of the deal, which was approved by both companies
boards, a Deutsche Telekom representative will join the AT&T
board. AT&T can increase the cash component so long as Deutsche
Telekom retains at least a 5 percent equity stake in it.
Deutsche Telekom is expected to use 5 billion euros to buy
back shares and 13 billion euros to lower its debt, said another
source with direct knowledge of the deal discussions. The source
said no other deals are planned in the medium term.
AT&T said that it will finance the cash portion with new
debt and cash on AT&T's balance sheet. AT&T will not assume any
T-Mobile USA debt and that the deal would add to earnings,
excluding non-cash amortization and integration costs, in the
third year after closing.
Representatives from the U.S. Federal Communications
Commission and Sprint declined comment as did officials from
Verizon Wireless, which is owned by Verizon Communications
and Vodafone Group Plc .
(Additional reporting by Paritosh Bansal and Michael Erman in
New York, Philipp Halstrick and Nicola Leske in Frankfurt and
Diane Bartz in Washington D.C.; Editing by Marguerita Choy and
Kenneth Li and Dhara Ranasinghe)