The Financial Case Against AT&T Buyout Of T-Mobile

Moody’s reports that it is concerned about the financial effects of the AT&T (NYSE: T) $39 billion buyout of T-Mobile. The US telecom will take on $20 billion in debt to close the deal. Moody’s believes that the balance sheet of current T-Mobile owner Deutsche Telekom will be improved.

AT&T has other obstacles to the transaction. Sprint-Nextel (NYSE: S) has self-serving objections. It will fall farther behind AT&T and Verizon Wireless if the deal is approved. Sprint already struggles to make money and keep its subscribers. Consumer groups are opposed as well. They say that the marriage will create a duopoly in the wireless market.

A warning about the debt load AT&T will shoulder is a reasonable one. Oddly, AT&T shares are near a 52-week high, but it may not be able to muster the sales growth necessary to pay for T-Mobile

AT&T’s landline business is in deep trouble and that will not end. People are “cutting the cord” of their home phones. These residents are more likely to use cellphones and VoIP communications tools. The largest profit centers AT&T and Verizon had a decade ago are decaying. That means cellular growth and home TV divisions have to grow rapidly to make up for the attrition.

The US cellular market is saturated. There are about 290 million cellular subscribers in America by most counts. The population is just over 311 million. Little children and some people don’t have or want phones. That means there are more handsets than their are people to use them. AT&T, Verizon Wireless, and Sprint fight for share in a slow-growing market. Each of these companies thinks it can charge more for data plans or faster connections. Consumers may reject that. Price wars may ensue which will depress margins just like in the airline industry.

The fiber-to-the-home projects created by AT&T and Verizon have been only modestly successful. They have not unseated incumbent technology like cable and satellite. That means the home TV market will not be a good one for them. The earnings that they hoped to get from fiber will not materialize even though they have already spent billions of dollars to build the infrastructure.

AT&T is likely to regret its plan to buy T-Mobile. It supposes that a larger subscriber base gives it an important advantage over Sprint and Verizon. That might be true if its businesses where not in bad shape already and headed for greater challenges still.

Douglas A. McIntyre