AT&T Inc. bowed to U.S. antitrust enforcers and withdrew its $39 billion acquisition of T-Mobile USA, ending a nine-month fight and leaving both carriers groping for a way forward.
AT&T will pay $3 billion in cash and turn over some of its wireless spectrum to T-Mobile's owner, Deutsche Telekom AG, for failing to complete the deal. The companies said they would enter a seven-year roaming agreement and seek new ways to bolster their cellular networks.
The high-profile defeat came after AT&T had already put on hold efforts to fight the Justice Department's suit to block the merger. In the end, the carrier decided it couldn't come up with a package of divestitures or other changes to the deal to appease U.S. officials that had deemed it anticompetitive.
U.S. authorities have approved some big mergers during the Obama administration, including Comcast Corp.'s acquisition of a majority of NBC Universal. But the Justice Department drew a line with AT&T's deal, arguing that combining the country's No. 2 and No. 4 wireless carriers would leave the market too concentrated, and likely raise prices for consumers. The Federal Communications Commission was also skeptical.
The Justice Department's tough stance suggests companies will need caution when proposing to take over direct rivals in businesses that are already concentrated. One deal in the works fits that description: the proposed $29 billion merger of pharmacy-benefit managers ExpressScripts Inc. and Medco Health Solutions Inc. That deal is under review by the Federal Trade Commission. The two companies have expressed confidence the merger will win approval.
AT&T's surrender means consumers will continue to choose from among four national wireless carriers. A deal, critics said, would have left more than 75% of cellphone customers under contract in the hands of either AT&T or Verizon Wireless.
T-Mobile's 33 million customers, however, still face an uncertain future. Deutsche Telekom has made clear it wants to exit the sluggish U.S. market and it isn't investing to build a higher-speed data network.
T-Mobile USA Chief Executive Philipp Humm urged his staff Monday to remain upbeat. "We have an opportunity to write our own future," he wrote in an internal memo. "The leadership team and I will be meeting intensively in the next few weeks on our go-forward plans for the business."
AT&T had pushed hard for a settlement with the Justice Department after the agency surprised the company with its antitrust suit in August. AT&T said it would fight the court case but privately offered up concessions, including selling off a large chunk of T-Mobile assets to another carrier, people familiar with the matter said.
But the Justice Department didn't budge, and AT&T decided to back down after getting the sense that no amount of divestitures would appease government lawyers, these people said. Last month, AT&T booked a $4 billion accounting charge for a potential break-up, an admission that the deal was unlikely to be completed. Shares of AT&T fell 11 cents to $28.74 in after-hours trading Monday.
In the end, the Justice Department remained unconvinced by AT&T's flurry of last-minute efforts to try to rescue its deal, including one that would have replaced a merger between the two companies with a joint venture, according to people familiar with the matter. Justice Department lawyers felt that AT&T had paid a huge premium not just to acquire the radio waves, but to eliminate a competitor. The options offered up by the companies were viewed by the Justice Department as "cosmetic" changes that wouldn't result in keeping a strong fourth competitor in the market, one person said.
"Consumers won today," said Sharis Pozen, head of the Justice Department's antitrust division. "Had AT&T acquired T-Mobile, consumers...would have faced higher prices and reduced innovation."
On Monday, AT&T Chief Executive Randall Stephenson said his company would continue to invest in its network and said policy makers "should allow the free markets to work so that additional spectrum is available."
AT&T had seen T-Mobile's spectrum holdings and thousands of cellphone towers as a quick solution to help ease the strains on its network that consumers blame for dropped calls. It will now have to find other ways to improve its network.
While AT&T has been focused on T-Mobile, Verizon has struck several deals to buy licenses for wireless spectrum from cable companies and others.
The deal's collapse is a blow to an already lackluster year for deal-making on Wall Street. Seven banks had been lined up to share about $150 million in fees had the deal gone through. Now they won't reap anywhere near that much.
And while the tie-up, at $39 billion, was a relative drop in the bucket amid the approximately $2.5 trillion in global mergers announced so far this year, it was the year's biggest and boosted hopes for more—hopes that failed to materialize in the second half of the year.
The merger partners are now back to square one. AT&T is expected to look to buy spectrum from other carriers and to press the government for auctions of more rights to the airwaves in order to shore up its network in places like New York City and San Francisco.
Deutsche Telekom will still explore a sale or merger of T-Mobile, since maintaining T-Mobile as a stand-alone carrier isn't seen as an economically viable option in the long term, people familiar with the matter said.
But the record break-up fee gives Deutsche Telekom some breathing room and flexibility, these people said.
One possible option for T-Mobile could be a tie-up with smaller rival Leap Wireless International Inc., which is the sixth largest U.S. carrier, people familiar with the matter said.
T-Mobile is the only national carrier that isn't building its own next-generation high-speed network. It's also the only one not selling Apple Inc.'s iPhone, making it harder to win the lucrative customers that sign contracts. It lost 850,000 such customers in the first nine months this year.
The deal's failure is a setback for AT&T's top executives, who exuded confidence about the takeover beginning with its announcement on March 20. For Mr. Stephenson, AT&T's CEO, the bid for T-Mobile was the biggest gamble in a tenure devoid of the sort of blockbuster deals that were a hallmark of his predecessor, Ed Whitacre. Mr. Whitacre created today's AT&T over more than a decade of deal-making that pieced together fragments of Ma Bell and rolled up several wireless companies.
AT&T's retreat marks a third big win for the Justice Department's antitrust enforcers this year. Earlier in the year, the department blocked a proposed merger between Nasdaq OMX Group Inc. and NYSE Euronext.
And in late October, the department won its first court challenge to a merger in seven years, persuading a federal judge to block H&R Block Inc.'s bid for low-cost rival TaxAct.
read more: Olympus Wealth Management
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