AT&T/T-Mobile: The Other Shoe Drops

Federal Communications Commission (FCC) Chairman Julius Genachowski will seek agency approval to refer the $39 billion merger of AT&T and T-Mobile USA to an administrative law judge (ALJ) for a trial-like hearing after agency staff determined the transaction is anticompetitive, harmful to consumers and detrimental to job creation.

Genachowski concurrently recommended conditional commission approval of AT&T’s $1.9 billion purchase of Qualcomm’s lower-700-MHz spectrum (6 megahertz to 12 megahertz nationwide). The latest moves by the FCC chairman, whose staff has continued to work closely with the Department of Justice (DoJ) following the government’s Aug.31 antitrust suit to block the AT&T/T-Mobile deal, was largely predictable and underscores the harsh reality for AT&T that options for salvaging the transaction are increasingly narrowing.

With FCC and staff working hand in glove on AT&T/T-Mobile since Day One and apparently in lockstep in merger analyses, Genachowski’s decision to seek agency approval to refer the merger to an ALJ (as the 180-day merger-review shot clock winds down) might suggest by inference AT&T is making little or no progress in pursing settlement talks with DoJ antitrust lawyers.

Though perhaps not obvious to the casual observer, a fundamental and eminently meaningful shift in merger dynamics has occurred, now that AT&T/T-Mobile is now before a federal judge and is likely to come under the purview of an FCC ALJ. Both changes in venue tend to significantly insulate the U.S. government’s consideration of AT&T/T-Mobile from the kind of potent political and lobbying activity that for months enabled AT&T to drive the narrative that U.S. approval was inevitable and win converts in the process. AT&T/T-Mobile has now become a lawyers’ game.

If there is a political card actively in play going forward, it is the jobs impact that has been invoked by the Obama Justice Department and FCC at a time when unemployment remains stubbornly high, and grassroots hostility against Wall Street and corporate America is becoming more animated on the cusp of a 2012 presidential election.

Fighting The Clock

AT&T is not only challenged with having to defend the proposed T-Mobile acquisition on two fronts, but it is also fighting the clock. The logistics and event sequencing involved in the federal court trial and ALJ hearing could easily stretch out deep into next year and bump up against the Sept. 20, 2012, deadline for completing AT&T/T-Mobile under the merger agreement. If necessary government approvals are not secured by that date, AT&T would be obligated to compensate DeutscheTelekom in the form of a break-up fee valued between $3 billion and $6 billion in cash, spectrum and roaming rights.

Genachowski has circulated a draft order recommending AT&T/T-Mobile be referred to ALJ Richard L. Sippel. We expect the full commission to vote in favor of the referral in the near future. It is anticipated the ALJ trial will commence after resolution of the merger antitrust case (beginning Feb. 13 and lasting four to six weeks) before U.S. District Judge Ellen S. Huvelle, though discovery and other procedural activity could begin in the ALJ hearing before the conclusion of the government trial.

The ALJ hearing could last six to 12 months, which (as noted above) raises the spectre of putting the regulatory process on a collision course with the A&T/T-Mobile merger deadline next September. Once the ALJ process is completed, Judge Sippel will forward his findings to the full commission for a vote.

AT&T, while facing even stiffer headwinds as a result of the FCC chairman’s move to block the T-Mobile purchase, still has several avenues open to keep the proposed merger on course. But it would take a confluence of positive outcomes against rising odds. A DoJ-AT&T settlement is still possible but we’ve seen little evidence that such an event is probable. AT&T may be better positioned to win at trial in the U.S. antitrust case.

Likewise, we are not necessarily encouraged at this time about the likelihood of AT&T succeeding in the ALJ hearing. However, even if the ALJ were to determine AT&T/T-Mobile is not in the public interest and the Democratic-led FCC voted to affirm that conclusion, the agency’s decision would become ripe for an appeal by AT&T.

One can assume that, regardless of the outcomes in U.S. District Court and the FCC, legal challenges will ensue. Neither time nor momentum is on the side of AT&T or T-Mobile.

– Jeffrey Silva is senior policy director/Telecommunications, Media and Technology at Washington, D.C.-based ?Medley Global Advisors LLC. Contact him at 202/434-0980.