AT&T Acquiring T-Mobile For $39 Billion; Let The Scrutiny Begin

While everyone else was waiting for news that Sprint (NYSE: S) was about to merge with T-Mobile USA, AT&T (NYSE: T) had a different deal in mind. In a startling Sunday afternoon announcement, AT&T said it is acquiring the fourth-largest carrier in a deal valued at $39 billion: Deutsche Telekom (NYSE: DT) will get at least $25 billion in cash plus a five-eight percent stake in AT&T.

If the deal is approved by federal regulators — which could take up to a year — AT&T will become the largest wireless carrier in the U.S., leapfrogging over rival Verizon by adding T-Mobile’s 33.7 million subscribers to reach nearly 130 million wireless subscribers. Verizon currently has about 101 million subscribers.

AT&T’s next steps: It’s been an open secret in the wireless world for a few months now that T-Mobile’s parent company was considering ways to offload the carrier, but most expected T-Mobile to eventually wind up with Sprint despite network integration issues that could have been messy. By hooking up with AT&T, T-Mobile now plans to pursue the LTE path to the so-called 4G wireless networking era, the companies said in the press release.

In addition to the 33.7 million customers, AT&T will also gain access to T-Mobile’s network of cell sites that could help AT&T improve the coverage of its notoriously flaky network. It will have to do the work to eventually upgrade those sites to the LTE standard, as T-Mobile had declared plans as recently as January’s Consumer Electronics Show to pursue a slightly different path to faster wireless speeds based on the HSPA+ technology. But those plans will now be scrapped, it would appear.

AT&T and T-Mobile’s existing networks are both based on the same standards, and both are in the midst of deploying HSPA+ networks. But AT&T also plans to start rolling out LTE-based networks in the middle of this year, which is also the same standard that Verizon and many other wireless carriers around the world are heading toward. If the world coalesced around LTE, and T-Mobile was unable to build such a network on its own, it might have faced trouble down the road in getting access to the latest and greatest smartphones that would probably debut for the largest volume network technology.

Solving the spectrum problem: Beyond the alphabet soup that characterizes the wireless industry, however, both companies were also facing potential problems with owning enough wireless spectrum to carry their data traffic over the airwaves. In its press release, AT&T said that based on current growth rates, it was going to exhaust the capacity of its existing spectrum before federal regulators opened up new spectrum to carriers. Buying T-Mobile gives it a way to expand those spectrum holdings in the near-term.

AT&T is clearly already worried about the prospect of having to shepherd the deal through government roadblocks, devoting a sizable portion of its press release to addressing concerns about competitiveness in the wireless market and arguing that the deal will allow the company to bring fast wireless data connections to 95 percent of America. It even cited the plan to merge the two companies as important to achieve President Obama’s recent talk about narrowing the digital divide, which likely had eyes rolling from coast to coast on a Sunday afternoon.

Make no mistake: the ripple effects of this deal will be felt in nearly every corner of the mobile market, should it come to pass. While AT&T claimed in its press release that the wireless market has lots of providers from consumers to chose among, in reality, the best phones and best networks only arrive at the current four major carriers, although Metro PCS and U.S. Cellular are becoming much stronger. With that number now being reduced, competition for the latest and greatest phones–and the seemingly requisite two-year contracts that come along with carrier subsidies–seems likely to increase.

Who’s the biggest loser? Perhaps the biggest loser from the deal will be Sprint, which now faces an uncertain future as its proposed path to 4G networking–WiMax–is extremely rocky. Clearwire (NSDQ: CLWR), one of Sprint’s major partners on WiMax technology, is in turmoil after several years of losses and a recent shakeup of its executive roster.

With Sprint and Verizon sharing a common 3G network technology, speculation is now likely to turn toward talks of a merger between those two companies. While that would likely meet with as much regulatory resistance as AT&T and T-Mobile’s proposal, it would give Sprint a path out of its 4G conundrum and allow Verizon to add Sprint’s 50 million customers to once again become the nation’s largest carrier.

Much attention will also be paid to how the deal affects prices for wireless service. T-Mobile had been known for a low-price approach to wireless service combined with strong customer support, two areas in which AT&T is not exactly considered a leader. AT&T tried to get out ahead of this potential issue as well in its release, noting that smaller carriers are competing on price and that even with several large mergers over the last decade of the wireless industry, prices declined 50 percent. As they say, however, past performance doesn’t necessarily indicate future results, and AT&T will have to find a way to keep T-Mobile’s cost-conscious customers on board to avoid losing customers to other carriers.

The deal’s announcement comes just days before the CEOs of all four wireless carriers in the U.S.–Ralph De La Vega of AT&T, Dan Hesse of Sprint, Philip Humm of T-Mobile USA, and Dan Mead of Verizon–are scheduled to participate in a panel at the CTIA Wireless conference in Orlando. Tuesday’s discussion (which we will cover) is likely to be much more interesting now given the proposed merger.

Update: Ina Fried reports that T-Mobile has canceled, citing extenuating work demands.”