AT&T ponders big divestiture to try to make T-Mobile acquisition work

AT&T Inc., with its T-Mobile USA takeover facing regulatory opposition, is preparing the biggest overhaul yet to the $39 billion deal, according to a Bloomberg News report.

The company is considering an offer to divest a substantially larger portion of assets than it had initially expected, said the person, who declined to be identified because the plan isn’t public. Although the exact size of the disposals hasn’t been determined, they could be as much as 40 percent of T-Mobile USA’s assets.

An asset sale would try to address the concerns of the Justice Department, which sued on Aug. 31 to block the takeover. Justice said the deal would “substantially lessen competition” in the wireless market. The acquisition was dealt another blow on Nov. 22, with the Federal Communications Commission signaling an attempt to block it.

“It’s going to be problematic for AT&T to find a successful divestiture solution,” said Kevin Smithen, an analyst with Macquarie Securities USA Inc. in New York.

The pool of potential buyers isn’t very big and those who might be interested probably wouldn’t have a chance, he said.

“It’s unlikely that the DOJ would allow a big competitor like Verizon to purchase the assets,” Smithen said.

Overland Park-based Sprint Nextel has made clear it feels highly threatened by the deal. Sprint would fall to a distant third among national carriers if the merger were approved. The company has teamed with consumer groups to paint the AT&T/T-Mobile deal as a killer of competition and technological innovation in the industry.

Sprint has said its cranked-up lobbying effort in Washington this year aims to stop the merger cold. But a greater divestiture in a merger could give Sprint a chance to quickly attain both customers and wireless spectrum, possibly at cut-rate prices. Those assets could be bought by AT&T, or other carriers, at a divestiture auction.

ATT’s proposal is likely to include the divestiture of a higher share of customers and lower percentage of spectrum, said the person familiar with the matter. The company needs more capacity to serve users as it adds customers and more of them adopt data-intensive smartphones.

Brad Burns, an AT&T spokesman, and Andreas Fuchs, a spokesman for T-Mobile’s parent company Deutsche Telekom, declined to comment.

On Monday, U.S. District Judge Ellen Segal Huvelle rescheduled a status hearing originally set for Wednesday on AT&T Inc.’s antitrust case for Dec. 9.

The asset-sale proposal might be the only remaining option if the second-largest U.S. wireless operator wants to avoid a long court battle in its bid to become the country’s top mobile carrier. The purchase may vault it past Verizon Wireless, depending on the size of the divestitures.

On Nov. 24, AT&T and Deutsche Telekom asked to pull their deal applications to the FCC so the companies could better focus on the Justice Department lawsuit. That was essentially a request for a do-over.

It’s not clear whether the FCC would allow a radical change in proposals. AT&T also said it would take a one-time charge of $4 billion to cover the breakup fee it will need to pay to Deutsche Telekom if the deal fails.

One approach is to propose a remedy that would lessen the market effect of losing the fourth-largest wireless service provider. AT&T has been in discussions with MetroPCS Communications Inc. and Leap Wireless International Inc. to sell spectrum and customers as a way of propping up competition in the absence of T-Mobile.

The second approach is to fight the court case, which is scheduled to begin Feb. 13.

“If there were a last, best offer to be made, they would have made it a long time ago,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York who has a “market perform” rating on AT&T. “It’s very hard to envision a solution that would satisfy the problems the DOJ found with the deal. Realistically, AT&T is going to take its chances in court in February. It’s all or nothing.”

According to a term in the agreement, AT&T would be able to pay less than the deal’s original $39 billion value if regulators demanded asset sales that surpassed 20 percent of that figure, or about $7.8 billion, three people with direct knowledge of the situation said Sept. 7.

AT&T could walk away from the deal and pay Deutsche Telekom a breakup fee if the concessions requested top 40 percent of that value, the people said. If the deal doesn’t happen, there’s no way AT&T can avoid paying the breakup fee, the people said.