NEW YORK/FRANKFURT AT&T Inc struck a $39 billion deal to buy Deutsche Telekom AG's T-Mobile USA, to create a new U.S. mobile market leader and bolster its constrained network against a near insatiable appetite for videos and data from Apple iPhone and iPad users.
The cash and stock deal, the largest deal this year, will give AT&T, the current No. 2 U.S. mobile carrier, an estimated 43 percent market share of customers in the United States from its current 32 percent, surpassing Verizon Wireless, which holds a 34.5 percent share, according to Tolaga Research estimates.
"This is a unique opportunity." AT&T Chief Executive Randall Stephenson told reporters on a conference call. "It's rare you have a transaction where the synergies are greater than the price paid."
AT&T says the deal, which is Stephenson's first big acquisition since he took over as CEO, will give AT&T much needed spectrum, or wireless airwaves, to provide the capability to support surges in the delivery of video, games and entertainment to smartphone and mobile devices.
The deal comes as U.S. wireless operators fight for wireless airwaves that are in short supply as consumers spend more time conducting video chats, playing games and downloading applications over mobile devices that rival the powers of desktop computers of just a few years ago.
Stephenson he had to "think differently" to address an expected eight-to-tenfold increase in demand for wireless network capacity in the next five years.
The transaction, which AT&T expects to close in 12 months, will surely face intense regulatory scrutiny. As a sign of AT&T's confidence it would pass regulatory muster, it agreed to pay a $3 billion breakup fee among other contingencies, according to the deal terms. AT&T said it is anticipating requests for divestitures in certain markets.
The two top operators -- a much larger AT&T and Verizon Wireless -- will account for nearly three out of four mobile subscriber in the United States, according to Forrester Research analyst Charles Golvin.
"I think it could reach some level of controversy," said an antitrust expert who asked not to be named. "There's going to be spectrum issues. This is going to be a complex deal and I don't think it's a foregone conclusion that it will be approved."
For Deutsche Telekom, the attractively valued deal terms of an estimated 7.1 times multiple of 2010 earnings before interest, tax, depreciation and amortization, gives it a tidy partial exit from the U.S. market that once held great promise at the turn of the millennium, but led to steep stock declines. Under the current terms of the deal, Deutsche Telekom could become AT&T's largest shareholder with an 8 percent stake.
Left unanswered is the fate of smaller rivals, namely Sprint Nextel, which had held talks to combine with T-Mobile USA, the No. 4 U.S. mobile service.
"Other reported deals involving T-Mobile would have joined together incompatible networks," said Larry Cohen, head of CWA the main U.S. telecommunications workers union. "Not only would that have forced a rebuild, but would have required new phones for T-Mobile customers."
The purchase price includes a cash payment of $25 billion with the balance to be paid using AT&T common stock. AT&T has the right to increase the cash portion of the purchase price by up to $4.2 billion.
As part of the deal, a Deutsche Telekom representative will join the AT&T board. AT&T can increase the cash component so long as Deutsche Telekom retails at least a 5 percent equity stake in it.
Deutsche Telekom is expected to use 5 billion euros to buy back shares and 13 billion euros to lower its debt, one source with direct knowledge of the deal discussions told Reuters. No other takeovers are planned in the medium term, the source said.
The agreement has been approved by the boards of both companies.
AT&T said it would finance the cash portion with new debt and cash on AT&T's balance sheet. AT&T has an 18-month commitment for a one-year unsecured bridge term facility underwritten by JPMorgan Chase & Co for $20 billion.
AT&T will not assume any debt from T-Mobile USA or Deutsche Telekom.
AT&T said the deal is expected to be accretive to earnings, excluding non-cash amortization and integration costs, in the third year after closing.
Representatives from Sprint declined comment as did officials from Verizon Wireless, which is owned by Verizon Communications and Vodafone Group Plc.