Dividend stock investors have been fond of telecom stocks in 2011, including Verizon (NYSE:VZ) and AT&T (NYSE:T). The two biggest players in the U.S. wireless market offer dividends that have been hovering around a 6% dividend yield for many months.
Unfortunately for AT&T stock investors, a planned $39 billion acquisition of T-Mobile USA — a subsidiary of Germany telecommunications giant Deutsche Telekom (PINK:DTEGY) — looks increasingly doubtful. Both companies announced over Thanksgiving that they are withdrawing their merger application with the FCC.
Corporate honchos haven’t bothered to put on happy faces, either. AT&T announced it will start placing $4 billion aside to pay for the very hefty break-up fee due to Deutsche Telekom if the buyout ultimately fails. Not an inspiring move.
To be clear, it was not an antitrust suit that squashed things. AT&T yanked its merger request on its own. But clearly the move was to avoid an intense antitrust investigation or review by a judge — hinting that even if the deal has potential, at the very least the first proposal by the telecom stock wasn’t going to be seen favorably by regulators.
So what’s next for AT&T stock? The question investors need to ask themselves is whether AT&T is worth hanging onto in light of these developments. There is not just the strategic loss of T-Mobile weighing on the stock now, but also the prospect of that $4 billion break-up fee — roughly 12% of the company’s quarterly revenue (about $31.5 billion) and about 40% of its annual dividend payments to shareholders (just north of $10 billion in 2011).
But let’s not overreact. Execs say they will resubmit the merger request. In a statement this weekend, AT&T made it painfully clear that the FCC cannot review its prior proposal and it is making a strategic move to voluntarily revise its proposal before regulators look under the hood. Some telecommunications insiders expect to see AT&T write in a stipulation it will sell off a huge chunk of T-Mobile’s assets — which it might not need anyway, considering the fact it already is one of the biggest fish in the wireless pond.
A New York Times article Sunday speculated these assets would either go to wireless rivals like Sprint (NYSE:S) as a way to ensure regulators don’t label the move anticompetitive, or to a cash-rich foreign telecom like Carlos Slim’s America Movil (NYSE:AMX) that would be willing to use the castoffs as a way to springboard into a lucrative U.S. market. Those schemes clearly aren’t in the best interest of AT&T, but the “peace offering” would win over some detractors without spoiling the gain of 33 million subscribers that AT&T desires.
Beyond that, we should remember the basic fact that AT&T is part of an existing duopoly in the U.S. wireless market and will remain entrenched. The No. 3 carrier in America, Sprint, hasn’t turned a profit since 2007. It pays no dividend, does about $33 billion in revenue annually and has a market capitalization a bit over $7 billion. AT&T yields over 6%, does $125 billion in annual revenue and is more than 20 times the size with a $160 billion market cap. It’s not like it needed this deal, and it’s not like anyone else other than Verizon (NYSE:VZ) is offering a competitive threat.