Cowen Group had a conference call to review the DOJ Antitrust Lawsuit against AT&T with Telecom lawyer, Andy Lipman of Bingham McCutchen. Below is the overview of this call as well as feedback from Hunter Newby, CEO of Allied Fiber.
Takeaways from DOJ Antitrust Lawsuit Review Call
Conclusion. Yesterday, we hosted a conference call with Andy Lipman who heads the telecom practice and Frank Lamancusa who specializes in enforcement at the law firm Bingham McCutchen. The purpose of the call was to discuss the announcement by the Department of Justice (DOJ) that it has decided to file an antitrust lawsuit to block AT&T’s proposed acquisition of T-Mobile USA (Tmo). The DOJ stated that it was concerned that approving the transaction would reduce competition resulting in higher prices, poorer quality services, and fewer choices/innovative products for consumers. Our key takeaways from the call are summarized below. While we continue to believe the fundamental outlook for standalone AT&T is improving and that its 6.2% dividend yield is highly attractive, we believe continued uncertainty surrounding the deal including potentially having to pay Tmo a sizable break-up fee (see below) will continue to weigh on the stock. Maintain Neutral rating.
Unlikely that lawsuit is being used as a bargaining chip. While some may view the lawsuit by the DOJ as a bargaining chip, Mr. Lipman believes this is unlikely for several reasons including 1) the DOJ is seeking a permanent injunction as opposed to a preliminary injunction, 2) the team that the DOJ has assembled to preside over the case includes top litigators as well as a trial specialist, and 3) in his opinion the complaint filed was well drafted, implying that the decision was well thought out. While AT&T has stated that it expects divestitures and has agreed that the $39B deal price would not change if divestitures were below $3.9B, and could not walk away if divestures were below $7.8B, it appears the DOJ did not feel divestures alone would be enough to maintain a competitive environment noting in the complaint that the Herfindahl-Hirschman Index (HHI) suggests that 96 of the top 100 markets were overly concentrated and in 15 markets the combined company would have >50% market share.
It is more economical for AT&T to fight than to walk away. AT&T released a statement noting that it was surprised by the lawsuit and that it plans to ask for an expedited hearing and that the company intends to contest the matter in court. While Mr. Lipman noted that AT&T has not been formally served and has 21 days to respond he believes it will try to meet with the judge over the next several days. Considering the large break-up fee associated with the transaction which we estimate in total to be ~$6B we are not at all surprised that AT&T has chosen to go to trial. Recall, the break fee includes three parts including 1) AT&T would pay Deutsche Telekom $3B, 2) AT&T would transfer highly valuable AWS spectrum to Tmo that covers 110 markets, including 17 of the top 30, and 3) AT&T would sign an attractively priced wholesale 3G roaming contract with Tmo giving them coverage outside their current ~220 POPs.
A decision could still come in 1H12. While Mr. Lipman stated that the government has historically won the majority of cases that have gone to trial, he also referenced the Oracle/PeopeSoft (2005) and Whole Foods/Wild Oats (2007) mergers that ended up in court but were eventually approved. He believes that the trial will likely take an extensive amount of time especially when considering the amount of economic issues that will be heavily debated such as how to look at competition on either a local (AT&T) or national (DOJ) basis as well as how many providers are needed for a market to be considered competitive. Mr. Lipman also views the Oracle case which lasted about seven months from complaint filing to court decision as a decent estimate as to how long the trial could take. This would imply that the merger could still hypothetically be approved in 1H12, which would still be in-line with AT&T’s original time frame.
FCC is likely to reach same decision as DOJ. Yesterday, FCC Chairman Julius Genachowski released a statement noting that his agency also has serious concerns about the impact that the proposed transaction would have on competition although he also pointed out that the agency’s process is not complete. Mr. Lipman believes that the FCC was only recently made aware of the lawsuit. Mr. Lipman and Mr. Lamancusa also pointed out that while the DOJ largely focuses on whether or not competition would be harmed when deciding to approve a transaction the FCC is more open to negotiations since they look at variables beyond competition such as efficiencies created through the deal, public safety and broadband build-outs. That said Mr. Lipman believes that while the FCC may simply be at a different point it is likely that they are on the same path as the DOJ. We would point out that the FCC has always come to the same decision as the DOJ.
Hunter Newby Feedback: I have serious concerns about the impact that the litigation will have on infrastructure investment for 4G wireless in the USA, both the timing and scale of it.
I suppose it comes down to the same question, “How long is it supposed to take to do something right?”
The DOJ (and FCC) clearly sees the monopoly/control issue, but must balance that with the need for investment in a real 4G LTE network.