Deutsche Telekom’s management has had two widely-reported
headaches over the past two to three years: the T-Mobile businesses in US and
UK. The UK dilemma was resolved about 18 months ago by a merger with Orange,
and now the group seems finally have found a dance partner for T-Mobile USA as
well. The fact that it’s in the end AT&T and not Sprint makes a lot of
sense. Both are GSM carriers, and merging them would give Deutsche Telekom
exposure to a market leader which will be much more convincing as an asset than
any T-Sprint could ever have been.
Nonetheless, at the same time the move is also much unexpected, since it will create a nationwide carrier that will be much more powerful (by nearlyone-third, in terms of subscriber market shares) than its closest challenger, Verizon. There’s no doubt that this will cause a major regulatory hiccup, and the new “T-AT” will have to shed spectrum and other assets in many areas where it operates. But at the end of the day, our take is that the deal will go through in a form or another. There are four reasons:
- T-Mobile is a weak player, and everyone knew that Deutsche Telekom had been looking an M&A solution for it. Without a merger (this or some other) T-Mobile would just fall behind in 4G investments and lose more ground.
- The FCC and the Department of Justice are likely
to evaluate the market impact on a market-by-market rather than nationwide
basis. So with some spectrum stripping and other divestments the new market
leader could well become palatable.
- The traditional telco model is dead in the water. Operators
simply don’t have the same pricing power in voice and messaging as they had
before, and thus they can’t really hike their call and SMS tariffs. Consumers
would just message via Facebook and call via VoIP.
- The trickiest part of all this is net
neutrality. Mobile data access will be a less competitive race from now on, and
it’s entirely possible that US operators won’t be given as free hands to manage
their data traffic as they might with an independent T-Mobile in the game. So
while the FCC relaxes intensely on the M&A front, it could – and indeed
should – get stricter when it comes to wireless net neutrality. In the
markets where there’s an inadequate broadband competition (including both fixed
and wireless) carriers should be allowed less freedoms to police the traffic.
What will the move mean to Deutsche Telekom’s operations elsewhere? Those $39 billion are a lot of cash and shares after all. Our guess is that – apart from a possible dividend increase, or a share buy-back – the money will probably just go to building the “gigabit society” of LTE and FTTH in Germany and across the rest of itsexisting footprint. With a notable exception of Poland, Deutsche Telekom doesn’t have much (regulatory) scope to boost its units by buying out rivals. It’s also too late to invest in e.g. Asia as a newcomer, given that the days of making easy money out of emerging telecoms markets are long gone.
