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The Obama administration Wednesday fired a legal broadside to block AT&T Inc.'s (T-N) $39 billion US acquisition of T-Mobile, launching its biggest challenge yet to a takeover and dealing the carrier a potentially costly blow.
AT&T plans to fight the government's decision in court and analysts say it might have to make big concessions-including selling major assets-to mollify regulators.
Shares in the No. 2 U.S. carrier behind Verizon Wireless (VZ-N) fell sharply. If the deal falls through, it may have to pay a break-up fee and benefits, such as spectrum grants, worth an estimated $6 billion.
The Justice Department in a lawsuit filed in federal court said eliminating T-Mobile as a competitor would be disastrous for consumers and would raise prices, particularly because the smaller provider is considered a pioneer in low-cost service plans.
"The biggest surprise is the timing. Many expected, because of how big the merger (is), the complexities, how big the stakes were, that it would take longer," said Medley Global Advisors analyst Jeffrey Silva.
The lawsuit is a serious attempt to halt a "fundamentally flawed" deal, not a tactic to wring out-sized concessions from AT&T, a source familiar with the lawsuit said.
"Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions, including price, quality and innovation, would be diminished," said Deputy Attorney General James Cole.
The department said it remains open to negotiations with the company.
The lawsuit caught the company and Wall Street by surprise, coming hours after the telecoms carrier announced it would bring back 5,000 call-center jobs to the United States if the deal closed. AT&T has argued that it needs the deal to secure enough wireless airwaves to meet growing demand for high-speed wireless services.
Company representatives met with Justice Department officials as recently as Tuesday, and received no indication of the lawsuit, a second source with knowledge of the meetings told Reuters.
"Clearly AT&T didn't expect this," said Pacific Crest Securities analyst Steve Clement. "It changes things for them with respect to the spectrum flexibility they'd have. They're going to have to be in the market to buy incremental spectrum."
The lawsuit is the biggest challenge to a takeover by the Obama administration, which includes former AT&T executive William Daley, who serves as White House chief of staff.
The deal also needs the approval of the Federal Communications Commission, which regulates wireless telecommunications. On Wednesday, FCC Chairman Julius Genachowski said he is concerned about the deal's impact on competition.
"Ultimately, post-concessions, we still expect the deal to be cleared-eventually," said Liberium Capital analyst Mark James.
A scuppered acquisition could prompt Sprint Nextel Corp. (S-N), the smallest of the top three U.S. carriers, to consider buying T-Mobile USA, a unit of Deutsche Telekom AG , analysts said.
More immediately, the decision is a letdown for the German carrier.
"It's a blow for Deutsche Telekom, who were looking to the deal as a solution to the protracted difficulties they've been facing in the U.S. market," said John Delaney, an analyst at technology research firm IDC.
"DT will gain some short-term consolation from the penalties it can exact from AT&T. But in the end, DT would still be stuck with the problem of how to turn around a sub-scale national operator with a declining subscriber base."
Sprint, which has loudly objected to the proposed deal, said the lawsuit was a "decisive victory for consumers."
Despite a spike in its shares, some analysts say the picture is not all good because the removal of T-Mobile-which has a reputation for aggressively under-cutting rivals on price-could have helped Sprint in certain market segments.
"It's mixed for Sprint. On the one hand, they were potentially going to lose T-Mobile USA as a competitor at the low end of the market," Clement said. "Now it's going to face a T-Mobile that's in a better position prior to the merger proposal, with extra cash and spectrum and a new roaming agreement with AT&T."