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By Jeremy Glaser | 03-21-2011 01:22 PM

Will AT&T's Deal Pass Regulatory Muster?

Morningstar's Mike Hodel thinks that AT&T's deal for T-Mobile is good for AT&T shareholders, but regulators may be hesitant to allow the telecom giant to get even bigger.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser.

AT&T announced this weekend that it intends to buy T-Mobile from Deutsche Telekom for $39 billion.

I am here today with associate director of equity research Mike Hodel to take a closer look at the deal, see what the chances of it going through are, and what the impacts could be on the broader wireless industry.

Mike, thanks for joining me today.

Michael Hodel: Thanks for having me.

Glaser: So, can you give us a little bit of background: Were people surprised that AT&T completed this deal? I know there was some talk that Sprint was thinking of purchasing T-Mobile from Deutsche Telekom.

Hodel: I don't know if people in general were surprised, but we certainly were. If you would have asked us a week ago whether a deal like this could get down or whether AT&T or Verizon Wireless would have attempted to do a deal like this, we would have said "no."

Our view has been that AT&T and Verizon Wireless are so much larger than the rest of the players in the industry that the regulatory hurdles that any further acquisitions would have to clear are so large that neither firm would try to do anything certainly of this scale.

So we were certainly shocked that AT&T made this announcement that they are going after T-Mobile.

Glaser: So, what about the price that AT&T is paying? Does this seem like a rich deal, or are they getting a bargain here?

Hodel: I think they are getting a very good price for T-Mobile. They are paying about seven times EBITDA, which is little bit on the high side maybe for a wireless company, probably right about in the right range. Again, may be little bit on the high side. But the cost-cutting opportunities available to AT&T with this deal are simply too big to ignore.

Both firms operate on the same network technology. They serve, obviously, overlapping markets. So, the opportunity to cut out marketing expenses, network expenses, etc., are huge. So there's plenty of opportunity for AT&T to create a lot of value for shareholders with this deal.

Glaser: So from the AT&T shareholders' perspective, this seems like a win?

Hodel: I think it is a win. It's a little bit more complicated than just to say it is a win. There's a breakup fee involved here. If regulators kill this deal or if the deal doesn't get done for any reason, AT&T is on the hook to pay T-Mobile $3 billion and give it some spectrum assets. So that does create a risk for AT&T, but we think that that risk is so small relative to the upside potential if the deal goes through that it's well worth the risk for AT&T shareholders. And the total value of the breakup fee is less than $1 per share to AT&T, and the amount of value that they create if the deal goes through is large.

Glaser: Let's talk about the regulators then. Certainly, that seems to be the biggest question mark over the deal right now. What do you think is going to happen? Do you think that this is going to see any sort of speedy approval, or do you think it's going to take a long time?

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