AT&T & T-Mobile: Nothing Ventured, Nothing Gained

DALLAS ( TheStreet) -- All the signs suggest that AT&T's ( T) proposed $39 billion merger with T-Mobile USA is hitting the rocks, but things could be worse for the U.S. telecom giant.

On Thursday, AT&T announced it expects to take a $4 billion pre-tax charge in the fourth quarter to reflect breakup fees associated with the controversial deal, which has run into opposition from the Federal Communications Commission and the Department of Justice.
AT&T's proposed $39 billion merger with T-Mobile USA looks increasingly unlikely.

AT&T and T-Mobile's parent company, Deutsche Telekom ( DT) also withdrew their applications for FCC approval of the deal earlier this week, focusing, at least for now, on obtaining antitrust clearance from the DoJ.

While the breakup fee suggests that the deal's prospects look bleak, this is hardly the end of the world for AT&T, according to Bernstein Research analyst Craig Moffett

"I don't know if this story works out so badly for AT&T," he explained, during an interview with CNBC on Friday. "While the break-up fee sounds like a large amount of money, this is a very large company -- this is a couple of months of cash flow from the AT&T wireless business."

Moffett characterized AT&T's attempted purchase of T-Mobile USA as a "calculated risk" designed to increase the pressure on arch rival and market leader Verizon ( VZ).

There had also been chatter that the breakup package could be valued at $6 billion, so the lower breakup fee can be seen as something of a positive.

"For AT&T, this represents an incremental step towards resolution, and arguably at a marginally lower break-up cost than some had feared," explained Moffett, in a research note released on Thursday. "The earlier this issue is resolved, the better."

In a news release, AT&T said the $4 billion charge would include $3 billion in cash and $1 billion in spectrum.

Investors largely shrugged off news of the anticipated $4 billion breakup charge, perhaps reflecting growing perception of the deal as a long shot. Shares of the no. 2 U.S. telecom firm dipped just 3 cents, or 0.11%, to $27.52 on Friday as the S&P 500 gained 0.13%.

AT&T reported solid fiscal third-quarter results last month, meeting Wall Street's earnings estimate while dipping below the consensus revenue target as customers delayed their Apple ( AAPL) iPhone purchases. AT&T also added 2.1 million wireless subscribers to pass the 100 million mark.

The company, however, predicted blockbuster smartphone sales in the fourth quarter, driven partly by Apple's new iPhone 4S.

Robin Bienenstock, another analyst at Bernstein Research, believes that T-Mobile's parent company, Deutsche Telekom, may seek out alternative deals, possibly in the cable sector.

"In the absence of another deal with AT&T, we think the most likely deal for Deutsche Telekom would therefore be with the cable industry," she explained, in a note. With T-Mobile likely to run into real spectrum constraints as early as 2012, and no spectrum auctions due in the U.S. until 2014/15, Beinenstock believes that a spectrum deal with Comcast ( CMCSA) or Time Warner Cable ( TWC) would be appealing to the German firm.

-- Written by James Rogers in New York.

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