FCC deals serious blow to AT&T and T-Mobile deal

November 22, 2011

AT&T, with its powerful army of lobbyists and years of experience navigating Washington, thought it could easily persuade the government to approve its merger with T-Mobile. But regulators aren’t buying it, and the $39 billion deal is facing its biggest threat yet.

Federal Communications Commission Chairman Julius Gena­chow­ski dealt a serious blow to the merger Tuesday, moving to block the deal on the basis of findings that it would cause job losses and higher prices for consumers, officials said. It was an unusual move for the FCC, which has not tried to block a deal since 2002.

AT&T now faces its second major barrier from the government. The Justice Department’s antitrust division has already sued and is scheduled to present its case against the deal in February before a federal judge.

“The FCC’s action today is disappointing,” said Larry Solomon, AT&T’s senior vice president of corporate communications. “It is yet another example of a government agency acting to prevent billions in new investment and the creation of many thousands of new jobs at a time when the U.S. economy desperately needs both. At this time, we are reviewing all options.”

The hurdles keep mounting for AT&T, which bet big on approval of the deal. If the merger falls apart, the company is on the hook to hand over $3 billion in cash and something perhaps even more valuable — some of the spectrum that allows a wireless firm to offer services — to T-Mobile’s corporate parent, Deutsche Telekom.

That looks increasingly likely with the FCC’s decision. The agency has asked for an administrative hearing that would take place after the Justice Department’s trial, meaning the government gets two cracks at blocking the deal.

It also lengthens the timeline for the deal’s approval, potentially running up against the September 2012 deadline that AT&T and Deutsche Telekom set for themselves to gain government approval. Running past the deadline would trigger the massive breakup fees.

Even more troubling for AT&T, the FCC has more ammunition to make its case. Both the Justice Department and the FCC can look at how the deal would harm competition. But the FCC can also look more broadly at how the deal would affect the public, including whether workers would lose their jobs.

AT&T tried to convince the government that the deal would create jobs, running a steady stream of TV ads touting the merger’s benefits. The company said it would bring back 5,000 positions that had been outsourced overseas. It also asserted that the deal would trigger an investment in broadband services that would create as many as 96,000 jobs.

But there have been hints that the FCC was skeptical of those arguments. In August, when the Justice Department filed its antitrust lawsuit against AT&T, Genachowski said the deal presented “serious concerns.” In October, the FCC asked AT&T for more data to back up its claims, saying the firm had “produced almost nothing.”

Tuesday’s decision means the matter will next go to a vote before the FCC’s commissioners, most likely ahead of their next scheduled meeting.

“The record clearly shows that, in no uncertain terms, this merger would result in a massive loss of U.S. jobs and investment,” said a senior F.C.C. official, who spoke on the condition of anonymity because of confidentiality agreements involving AT&T’s estimates. The official declined to provide specific figures for jobs lost.

The FCC succeeded the last time it tried to block a deal. In 2002, the agency sought an administrative hearing to stop a merger between EchoStar and Direc­TV. EchoStar later dropped out of the deal.

“The prospects of this trans­action being successfully completed are significantly lower today than they were yesterday,” said Andrew Jay Schwartzman, senior vice president and policy director of the Media Access Project, a public interest group.

The reach of the wireless industry has grown vastly as the popularity of smartphones has exploded, spurring carriers to build next-generation broadband networks. Beyond calls, mobile phones have become mini-computers capable of showing movies and running advanced games. That has turned wireless carriers into powerful gatekeepers.

AT&T has said acquiring T-Mobile would make it easier for the company to upgrade its network and improve its service. AT&T is also facing stiff competition from its primary rival, Verizon.

But many consumer advocates have argued that an independent T-Mobile helps keep costs down for cellphone users because the company frequently offers cheaper deals than its bigger competitors.

Jia Lynn Yang is a staff writer at The Washington Post who covers policy and business. Before joining the Post, she worked at Fortune magazine.
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