Mega AT&T deal cements Morgan Stanley's lead

NEW YORK Fri Mar 25, 2011 12:46pm EDT

The entrance to the Morgan Stanley headquarters is seen in New York, May 12, 2010. Picture taken May 12, 2010. REUTERS/Shannon Stapleton

The entrance to the Morgan Stanley headquarters is seen in New York, May 12, 2010. Picture taken May 12, 2010.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - AT&T Inc's (T.N) blockbuster deal for T-Mobile USA cements Morgan Stanley's (MS.N) position as the top dog in adviser rankings and is the culmination of a year of work by its telecoms team.

The $39 billion acquisition, which promises a $145 million fee bonanza for the advisers, is the biggest global telecom deal since AT&T's $89.4 billion purchase of BellSouth in 2006.

It came after a 15-strong team of bankers led by Morgan Stanley head of North American Telecom Adam Shepard, head of Wireless Banking Jim Murray and technology veteran Bob Eatroff spent a year guiding Deutsche Telekom AG (DTEGn.DE) through numerous options for its T-Mobile USA unit, sources familiar with the situation said.

Deutsche Telekom had explored options including an initial public offering for T-Mobile USA or a deal with Sprint Nextel Corp (S.N), but finally settled on a sale to AT&T at a premium that some analysts have estimated at 50 percent, or a whopping $1,147 per subscriber.

By this metric, Sprint would be worth $57 billion instead of its current market value of around $13 billion.

"When I saw the news, I read the headline, and it didn't compute," said one banker who was not involved in the deal. "I looked at it again and thought there has to be a mistake here. I was blown away by it."

The banker requested anonymity because he was not authorized to talk to the press.

The dialogue began in December, when AT&T Chief Executive Randall Stephenson reached out to Deutsche Telekom CEO Rene Obermann, the sources said.

While both sides had a army of bankers, two of the sources said Deutsche Telekom's banker Morgan Stanley and boutique investment firm Greenhill & Co Inc (GHL.N), which advised AT&T, took the lead to seal the year's biggest M&A deal, culminating in a handshake agreement a week ago.

The other bankers, including on AT&T's side, were brought in much more recently. Nonetheless, they still earned hefty fees.

Advisory fees for banks working with the seller, Deutsche Telekom, should be $50 million to $60 million, split among Morgan Stanley, Credit Suisse (CSGN.VX) and Deutsche Bank (DBKGn.DE), according to estimates by Freeman & Co, a consultancy firm.

Fees paid to the banks advising AT&T should be $55 million to $65 million, split between JPMorgan Chase (JPM.N), Greenhill and Evercore (EVR.N), Freeman said.

JPMorgan also will reap fees for underwriting a $20 billion bridge loan to AT&T, the upfront arrangement fees for which could be about $20 million, Freeman said.

The loan ranks as the second-largest bridge loan since 2000, according to Thomson Reuters LPC.

BANKER BONANZA

The deal is the latest among a series of transformational deals for Morgan Stanley's telecom bankers. Morgan Stanley was also the sole adviser to Verizon Wireless (VZ.N) (VOD.L) on its $28 billion purchase of Alltel in 2008, and Clearwire on its $15 billion joint venture with Sprint that year.

The Morgan Stanley team included bankers in New York, Chicago and four bankers in Europe.

As the lead Deutsche Telekom advisers, they were able to talk AT&T into not only paying a hefty price for T-Mobile USA, whose profits have declined, but also accepting an unusually large break-up fee.

AT&T agreed to pay $3 billion and to give T-Mobile USA wireless airwaves if regulators reject the deal.

The reverse break-up fee ranks as the third largest on record, Thomson Reuters data shows.

FEE INCOME

The AT&T-T-Mobile deal should drive huge fees for investment banks and law firms, and will lift them in the closely followed M&A league table rankings.

Shares of boutique investment firms Evercore Partners Inc (EVR.N) and Greenhill, which advised AT&T on the deal, jumped on Monday on expectations of a lump sum in fees.

The deal also comes with other benefits to the advisers. Credit Suisse and Deutsche Bank rise in the worldwide league tables to No. 5 and No. 8, respectively.

On AT&T's side, JPMorgan Chase & Co rises one spot to No. 2. Greenhill & Co, which was not previously in the top 25, is now No. 13. Evercore Partners rises three places to No. 7.

(For a graphic showing M&A league tables, see r.reuters.com/bek68r.)

Those that missed out on this year's largest M&A deal include Goldman Sachs (GS.N) , which was advising Sprint, a source familiar with the matter said. Sprint is now left scrambling to work out its next move. Goldman did not respond to calls for comment.

Goldman Sachs retained its No. 4 spot in the worldwide league tables, but it missed out on advisory fees.

Typical fees in a transaction of this size are 0.15 to 0.17 percent of the deal's value for buy-side M&A advisers, and 0.14 to 0.16 percent for the sell-side banks, according to Freeman Managing Director Teck-Tjuan Yap.

The fee percentage tends to go up as the deal size goes down. In a $1 billion deal, for instance, fees typically would be 0.75 to 1.0 percent, Yap said.

The T-Mobile deal is the largest pure M&A transaction this year but is smaller in size than American International Group Inc's (AIG.N) restructuring, in which the U.S. Treasury converted $49 billion of preferred shares into common stock.

(Additional reporting and writing by Paritosh Bansal in New York and Quentin Webb in London; Editing by John Wallace, Dave Zimmerman, Steve Orlofsky and Carol Bishopric)

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