* Acquisition would drive up prices, hurt competition -DOJ
* AT&T says to fight DOJ decision in court
* FCC has made no decision but cites "serious concerns"
* AT&T shares close down 3.8 pct, DT shares down 7.6 pct
(Adds more analyst comment, updates shares)
By Jeremy Pelofsky and Sinead Carew
WASHINGTON/NEW YORK, Aug 31 The U.S. government
on Wednesday sued to block AT&T Inc's (T.N) $39 billion
purchase of T-Mobile USA, citing concerns it will harm
competition in the wireless market and lead to higher prices.
The surprise move, which was the biggest antitrust
challenge yet by the Obama administration, caught the carriers
by surprise and if successful would end AT&T's move to unseat
Verizon Wireless as the No. 1 U.S. mobile carrier.
If AT&T fails to defeat the Justice Department lawsuit, it
will prove very costly -- the No. 2 carrier would have to pay
T-Mobile parent Deutsche Telekom (DTEGn.DE) an estimated $6
billion in cash and other assets as part of the original deal.
The announcement is a slap in the face for AT&T Chief
Executive Randall Stephenson, who was poised for a
career-defining deal that would allow him to emerge from the
shadow of predecessor and serial acquirer Ed Whitacre.
The court case could take months and cost millions of
dollars. Wall Street immediately signaled the deal was likely
now a longshot, with shares in the companies falling sharply.
Justice Department officials warned that allowing AT&T to
gobble up the No. 4 carrier would be disastrous for consumers.
"Were the merger to proceed, there would only be three
providers with 90 percent of the market, and competition among
the remaining competitors on all dimensions, including price,
quality and innovation, would be diminished," Deputy Attorney
General James Cole told reporters.
Take a look at related stories [ID:nN1E77U1VX]
Graphic on telecom tie-up r.reuters.com/wuj68r
Reuters Insider link.reuters.com/dak53s
Breakingviews-Watchdogs call AT&T wager [ID:nN1E77U0WC]
The lawsuit came only five months after the deal was
announced and despite the surprising timing, one source close
to the case said it was a real attempt to halt a "fundamentally
flawed" deal, not a tactic to wring big concessions from AT&T.
They would have to give up "so much" to win approval, the
source said. Still, Justice Department officials said they were
willing to consider proposals to ameliorate their concerns, but
they expected to the fight to shift to federal court.
A source close to one of the carriers said they may have to
offer to divest up to 25 percent of the combined company's
assets, up from an earlier estimate of up to 10 percent, to try
to save the deal.
James Ratcliffe, an analyst at Barclays Capital slashed his
expectations that the deal would win approval to a range of 35
percent to 40 percent, down from 75 percent.
CAUGHT BY SURPRISE
The government's lawsuit overshadowed an announcement just
hours earlier by AT&T that it would bring back 5,000 call
center jobs to the United States if the deal closed.
Just a day ago, the two sides had met to continue
discussions on the merger and the Justice Department dropped no
hints that it was getting frustrated with the talks.
The two sides were "talking past each other," said one
source familiar with the case, adding that the Justice
Department side felt that nothing was really presented to
address their competition concerns. [ID:nN1E77U1J6]
AT&T's Stephenson has argued that his company needs
T-Mobile to get more wireless airwaves to meet exploding demand
for high-speed mobile services from smartphones and tablets.
Stephenson put himself on the line with this deal so he has
no choice but to double down, said a person close to AT&T.
Shares of AT&T closed down 3.8 percent at $28.48 on the New
York Stock Exchange, while Deutsche Telekom shares fell 7.6
percent to 8.81 euros in Frankfurt trade.
"This one took everybody by surprise," said a person close
to one of the carriers, adding that they thought the Justice
Department would ask for concessions but not derail the deal.
Meanwhile shares of Sprint Nextel Corp (S.N) -- the No. 3
U.S. wireless carrier, which has fiercely opposed the deal --
shot up almost 6 percent to close at $3.76. A scuppered
acquisition could prompt Sprint to consider buying T-Mobile.
AT&T's high-powered lobbying team in Washington is led by
Jim Cicconi, who previously worked in the Reagan and Bush
"We thought the weight of AT&T's lobbying was having some
success; this very much undermines that. It's very uncertain
where this leaves us at the moment," said Andrew Hogley,
telecom analyst at Espirito Santo investment bank.
If the government succeeds in blocking the deal, it would
also be a major setback for Deutsche Telekom, which for years
has been looking for a way out of T-Mobile USA, a business that
has ceased to be a source of growth. [ID:nL5E7JV347]
Deutsche Telekom "will gain some short-term consolation
from the penalties it can exact from AT&T," said John Delaney,
an analyst at technology research firm IDC. "But in the end, DT
would still be stuck with the problem of how to turn around a
sub-scale national operator with a declining subscriber base."
The news also sent chills through the mergers and
acquisitions market. Not only do the seven investment banks
that advised on this deal stand to lose about $150 million in
fees, but bankers elsewhere were also worried it could make
companies think twice about antitrust risk when mulling
Antitrust experts saw this case as the signature antitrust
event for the Obama administration, which includes former AT&T
executive William Daley serving as White House chief of staff.
"This is an administration that came in saying it was going
to have a more aggressive approach," said Michael Sohn, an
antitrust attorney with Davis Polk Wardwell LLP.
The administration has cleared some big deals like Comcast
Corp's (CMCSA.O) purchase of NBC Universal, but Nasdaq OMX
Group Inc (NDAQ.O) and IntercontinentalExchange (ICE.N)
withdrew a hostile bid for NYSE Euronext NYX.N after
opposition from antitrust regulators. [ID:nN1E77U246]
"I think the court is going to block it," said Andy Gavil,
who teaches law at Howard University in Washington and
testified to Congress on the deal. "Having read the complaint,
I don't see a basis for a negotiated settlement."
One thing most experts agree on is that it would take a
long time for the case to wind its way through the courts. The
question remains whether the companies are willing to pursue
that route and for how long, or go their separate ways.
Another complicating factor is that the deal also needs
approve by the Federal Communications Commission, which
regulates wireless communications.
"Although our process is not complete, the record before
this agency also raises serious concerns about the impact of
the proposed transaction on competition," said FCC Chairman
The case is USA v. AT&T Inc et al, No. 11-cv-1560 in U.S.
District Court for the District of Columbia.
(Additional reporting by Diane Bartz and Jasmin Melvin in
Washington, Nadia Damouni in New York, Georgina Prodhan and
Victoria Howley in London, Nicola Leske in Berlin, and Edwin
Chan in San Francisco. Editing by Robert MacMillan, Gary Hill)