Marriages are as common in wireless industry as call drops, inflated bills and pitiable customer service. However, the acquisition of T-Mobile USA, the struggling telco, which pitchforks AT&T to the top of the heap in the US telecom industry, promises to address these concerns. Music to the ears of the combined firms’ subscribers?
AT&T, the US telecommunications goliath pounces on another David in its quest to grow further big even as critics ask how big is big in the wireless industry. The David in question is none other than T-Mobile USA, the US arm of the German telecom major, Deutsche Telekom. AT&T, the second largest US telco, which has agreed to pay $39bn in a cash-and-stock deal to acquire the fourth largest operator, as a result emerges as the largest telecom operator in the US with a market share of 43% in terms of customer base, dethroning the incumbent, Verizon Wireless.
The logic behind the deal is usual: optimal utilization of network assets to add capacity and to improve network. However, the biggest driver, as the duo claim, is the impending shortage of wireless spectrum in some markets, which limits both operators’ ability to meet the ongoing explosive demand for mobile broadband. AT&T, which grew its mobile data traffic 8,000% over the past four years, is expected to face spectrum crunch by 2015, given its rapid pace of growth; it is expected to grow to become 8-10 times of its current size. Together the two operators can harness their network capacity to overcome this challenge. “It will improve network quality, and it will bring advanced LTE capabilities to more than 294 million people,” quipped Randall Stephenson, AT&T Chairman and CEO. He added, “Mobile broadband networks drive economic opportunity everywhere, and they enable the expanding high-tech ecosystem that includes device makers, cloud and content providers, app developers, customers, and more.”
Turning around T-Mobile
While AT&T has been gunning for glory with rapid rollout of its 4G or LTE (Long Term Evolution), a promising technology, where T-Mobile USA has lagged behind others, constrained by financial losses and increased customer churn. It posted its first quarterly loss of subscribers during the March quarter of 2010, registering a net loss of 77,000 customers (a drop of 92%) against a net gain of 415,000 customers in the year-ago quarter and the trend continued in the concluding quarter as well. “High contract churn and significant contract customer losses in the fourth quarter of 2010 indicate that we still have a fair amount of work ahead of us and that any turnaround will take time,” a release from the company said. T-Mobile USA had 33.73 million customers at the end of the fourth quarter of 2010, down from 33.76 million at the end of the third quarter of 2010 and 33.79 million at the end of the fourth quarter of 2009 while net customer losses were 23,000, compared to net additions of 137,000 in the third quarter of 2010 and 371,000 in the fourth quarter of 2009. Contract customers were the primary driver for the sequential and year-on-year change in net customers, the company said. T-Mobile USA has also lagged behind rivals in terms of rollout of smartphones: the company’s failure to offer iPhone has reportedly frustrated customers most of whom shifted loyalty to rivals like AT&T.
However, AT&T says that potential synergy gains outweigh the weaknesses, as it hopes to reap synergies with a run rate of more than $3bn, three years after closing onward (excluding integration costs); the deal is expected to be closed by the next year i.e., 2012. The expected synergy gains would come from the opportunities to increase smart phone penetration and improved data average revenue per user. Besides, it also expects to earn substantial cost savings through network efficiencies, subscriber and support savings, reduced churn and avoided capital and spectrum expenditures.
Philipp Humm, CEO of T-Mobile USA, termed the deal the “best possible solution,” even as he struggles to revive the sagging fortunes of the firm amid lackluster financials and rising customer churn. “The sale of T-Mobile USA to AT&T is the best possible solution for our business and for our customers. The merger will ensure the deployment of a robust 4G network to 95% of the U.S. population, something neither company could achieve on its own,” he wrote in an internal memo to the firm’s employees after the deal was announced. Trying to allay employees’ fears over cultural and retrenchment issues, he wrote, “I know this news is unexpected and may be somewhat unsettling, but I am confident that our strong culture and T-Mobile USA Values will help guide us through this process.”
The T-Mobile buyout will help AT&T effectively address spectrum challenge and enhance customer experience including improved voice quality for customers on the back of additional spectrum, increased cell tower density and broader network infrastructure. The acquisition also allows AT&T immediately access to vital infrastructure such as cell sites equivalent to what would have taken on average five years to build without the transaction, and double that in some markets, AT&T said in its press release. ‘The combination will increase AT&T’s network density by approximately 30 percent in some of its most populated areas, while avoiding the need to construct additional cell towers.’ It also said that the ‘transaction will increase spectrum efficiency to increase capacity and output, which not only improves service, but is also the best way to ensure competitive prices and services in a market where demand is extremely high and spectrum is in short supply.’
Concerns ring in
However, the mega M&A deal has also raised hackles amongst anti-trust lobbyists and some consumer groups which feel that it would lead to creation of a monopolist - the deal will eliminate one out of four major telcos – and would raise tariffs for customers. According to Gigi Sohn, President, Public Knowledge, “T- mobile has competed on price. That's what their all about. So, when you take them out of the equation, it gives companies like AT&T, and companies like Verizon, license to raise their prices.”
Besides, this would also bloat the balance sheet of AT&T as it would be financing the deal through borrowings. It is this concern that has led rating agencies like Moody’s, which expect the carrier to raise about $20bn in new debt to fund the acquisition, has reportedly said that additional debt burden would push the company’s balance of debt to earnings outside Moody's guidelines for the “A2” investment-grade rating it currently has on AT&T.
But AT&T has feasted and grown monstrous on mergers & acquisitions in its long and successful history. So it is unlikely the present noises about antitrust and tariffs will unnerve the quintessential acquirer. However, that does not stop regulators from intervening as and when needed and ensuring that customers’ interests are protected.
Amy
(image courtesy: AT&T)
No comments:
Post a Comment