The Justice Department sued on Wednesday to block AT&T’s proposed $39 billion acquisition of T-Mobile, a deal that would create the largest carrier in the country and reshape the industry.
“The department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services,”
– said James M. Cole, the deputy attorney general.
AT&T said it would “vigorously contest this matter in court.”
The Justice Department’s complaint, which was filed in United States District Court in Washington, said that T-Mobile “places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition.”
The complaint also highlighted T-Mobile’s high speed network and its innovations in technology, noting that it was the first to use Google’s Android operating system and BlackBerry wireless email, among other things.
“AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market,” the complaint said. “Thus, unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.”
Shares of AT&T dropped nearly 4 percent on the news, to less than $29. Shares of Deutsche Telekom, the parent of T-Mobile, fell 5 percent in trading in Frankfurt.
The Justice Department has broad authority to influence proposed deals.
In January, the U.S. sued Comcast for its proposed merger with NBC Universal; the case was settled at the same time with Comcast agreeing to some concessions.
On rare occasions, the agency takes the more aggressive step of suing to block a deal altogether, as it did with AT&T and earlier this year with H&R Block’s bid for the owner of TaxAct tax-preparation software.
Sometimes just the threat of legal action is enough to stymie a deal, as in May when Nasdaq dropped its rival bid for the New York Stock Exchange’s parent company. In other cases, the Justice Department will remain silent, blessing a deal by default.
In a statement, AT&T said: “We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the D.O.J. that this action was being contemplated.
“We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The D.O.J. has the burden of proving alleged anticompetitive affects and we intend to vigorously contest this matter in court.”
That could mean a potentially lengthy court fight. Companies have triumphed over the Justice Department before, such as a federal judge sided with Oracle in its purchase of Peoplesoft in 2004.
AT&T has one powerful incentive to try to salvage the deal. Under the terms of the agreement that AT&T signed with Deutsche Telekom, AT&T would pay a breakup fee of $3 billion in cash, as well as a roaming agreement and spectrum rights — an estimated total value of $6 billion — if the acquisition did not go through for regulatory reasons.
AT&T already has three high-priced law firms advising on the deal, including Sullivan & Cromwell, Arnold & Porter and Crowell & Moring. T-Mobile is receiving legal advice on the merger from Wachtell, Lipton, Rosen & Katz; Cleary, Gottlieb, Steen & Hamilton; and Wiley Rein.
Ever since AT&T announced plans to buy T-Mobile from Deutsche Telekom for $39 billion in March, the deal has proved controversial. Lawmakers, consumer advocates and rivals have voiced opposition to the merger, saying it would significantly reduce competition. The deal would have left just three major players: AT&T, Verizon and the significantly smaller Sprint Nextel.
The complaint also noted that AT&T and T-Mobile currently compete head to head in 97 of the 100 biggest wireless markets in the country.
“Sprint urges the United States government to block this anti-competitive acquisition,” Vonya McCann, Sprint’s senior vice president for government affairs, said back in March. “This transaction will harm consumers and harm competition at a time when this country can least afford it.”
Shares of Sprint Nextel were up nearly 6 percent.
The Justice Department’s complaint noted that while there were smaller telecommunications providers, none of their voice networks “cover even one-third of the U.S. population, and the largest of these smaller carriers has less than one-third the number of wireless connections as T-Mobile.”
On Wednesday, AT&T said that “we remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court.”
The company repeated its arguments that a merger would “help solve our nation’s spectrum exhaust situation and improve wireless service for millions,” would expand 4G mobile broadband and would mean billions in additional investment and tens of thousands of jobs.