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Where AT&T Stands After the T-Mobile Split

At big corporate weddings these days, when the judge says “Speak now or forever hold your peace,” every eye shifts to the Department of Justice. And on Monday, after months of trying to convince the DOJ that its planned $39 billion marriage to Deutsche Telekom’s T-Mobile would deliver broadband wireless bliss to businesses and consumers, AT&T (NYSE:T) finally called it quits.

T-Mobile gets a small bauble for its trouble — $3 billion in cash, about $1 billion in wireless spectrum in 128 markets and a seven-year network use or “roaming” agreement. But the carrier still is burning through some $3 billion a year, so the cash and spectrum won’t help for long. Sooner or later, Deutsche Telekom likely will seek an exit strategy from the tougher-than-expected U.S. wireless market.

AT&T loses big. In addition to the $4 billion charge it will take in the current quarter, AT&T loses much-needed access to T-Mobile’s advanced wireless service (AWS) frequencies. With that block of frequencies — known in the industry as “spectrum” — AT&T could have launched its high-test Long Term Evolution (LTE) wireless network nationwide, boosting its ability to compete with Verizon (NYSE:VZ), the largest U.S. wireless carrier.

More importantly, AT&T has lost irrecoverable time that could have been better spent seeking out other growth options — like purchasing AWS licenses from others. That’s what Verizon did earlier this month, cutting a $3.6 billion deal with cable consortium SpectrumCo. — a troika comprised of heavy-hitters like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), as well as Bright House Networks.

AT&T now plans to pay Qualcomm (NASDAQ:QCOM) nearly $2 billion for three blocks of currently unused 700 MHz spectrum. But the task of integrating Qualcomm’s frequencies with its own AWS spectrum to craft a cohesive 4G network will cost between $1 billion and $2 billion and can’t be deployed until 2014, according to the trade publication Fierce Wireless.

The Verizon deal currently is in front of the FCC; public interest groups are urging the Justice Department and FCC to nix the sale, which is unlikely. The regulator, which must approve the Qualcomm deal as well, could take as long as six months to rule on the spectrum purchase. Odds are good that the FCC will approve both sales. Then again, DOJ has a lot of new clout right now and could have enough swagger to try to run the table and quash both bids.

The big winner in the AT&T/T-Mobile breakup obviously is Verizon, particularly if regulators OK the new AWS spectrum purchase. With the T-Mobile deal now officially off the table, there are only two companies with large blocks of AWS spectrum left for AT&T to woo: pay-TV provider Dish Network (NASDAQ:DISH) and wireless Internet provider Clearwire (NASDAQ:CLWR). And failure to secure more frequencies could stop AT&T’s 4G network in its tracks.

Because the breakup had been coming for months, it’s surprising AT&T did not aggressively pursue other options.

When the nation’s second- and fourth-largest wireless companies announced their engagement back in March, it looked like a match made in 4G heaven. The merger would have created the nation’s largest wireless company, given AT&T access to enough valuable spectrum to launch its high-test LTE network nationwide to compete with Verizon and boosted cash-strapped T-Mobile’s fortunes. To sweeten the pot, AT&T vowed to spend $8 billion to bring advanced wireless service to rural areas.

But the Obama administration never warmed to the engagement. Eight days after the pair announced their merger plans, the nation’s third-largest wireless carrier, Sprint Nextel (NYSE:S), cried foul, urging regulators to block a deal that would create an “anti-competitive” wireless “duopoly” between AT&T and Verizon. With the deal under intense scrutiny by some Senate Democrats, AT&T offered to create 5,000 call center jobs in the U.S. in exchange for regulatory approval.

By the end of August, not only had the FCC spurned the jobs offer, but the Justice Department had filed an antitrust lawsuit against AT&T. While AT&T vowed to fight the suit vigorously, by Thanksgiving, the deal also faced opposition from seven attorneys general and the FCC, and AT&T withdrew its merger request. On Monday, AT&T finally gave up.

It’s too soon to say whether investors will take out their frustrations over the lost deal on AT&T CEO Randall Stephenson. This was Stephenson’s first attempt at a mega-deal since stepping into the CEO job four years ago, and some analysts believe that he might have “overreached.” However, immediate reaction was muted — by Tuesday afternoon, AT&T shares actually were up more than 1%.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media, https://investorplace.com/2011/12/att-t-stock-t-mobile-merger-qualcomm-verizon/.

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