AT&T's $6bn gamble: The cost of T-Mobile merger failure

Even though the Senate was pretty tough on AT&T and T-Mobile executives at the hearing on Monday, questioning whether the merger of the two companies would benefit consumers or just bring AT&T closer to a monopoly (or a duopoly with Verizon), it seems AT&T is pretty confident that the deal will go through. In fact, AT&T is betting $6 billion on it.

Sources have told Reuters that AT&T has promised to give Deutsche Telekom (the parent company of T-Mobile USA) $6 billion in assets, services and cash as a break-up fee in the event that U.S. regulators reject the deal, which is worth $39 billion. The $6 billion payment would include $3 billion cash and also about $2 billion worth of spectrum, in addition to a $1 billion roaming agreement. This would be one expensive break-up, cracking records for such a thing, since it adds up to 15.4% of the purchase price, according to Thomson Reuters Data.

So the interesting thing here is that this extra cash could allow T-Mobile to develop a 4G LTE network should the deal fail. T-Mobile said at the senate hearing on Monday that they lack the capital to do that right now. That $2 billion in spectrum would pay for roughly 10 megahertz of spectrum, Fabricio Martinez, a UK-based consultant from Aircom International said. That would be the minumum necessary to offer LTE service, though 20 megahertz would be ideal, and it would double T-Mobile's current available spectrum. 10 mhz would increase data speeds by 1 1/2 times, and 20mhz would increase them by 4 times.

So in any case, they will come out of this in much better shape than they went in, and will be handsomely compensated for the huge amount of work and lost productivity preparing for a merger would cause. But AT&T would not be likely to make such an offer unless they were fairly sure that the deal would be approved in the end.

It still needs approval from U.S. telecommunications regulator, the Federal Communications Commission, and the Department of Justice.

[via Reuters]