AT&T Inc. fired back at the Justice Department, saying its $39 billion takeover of T-Mobile USA would usher in more competition, improve wireless service and lead to lower prices.

The comments, filed in federal court in Washington, D.C., Friday, are AT&T's first formal reply to the government's effort to block the deal. At the heart of the rebuttal is the notion that T-Mobile USA is too weak to be an effective competitor and its removal from the market wouldn't harm consumers.

The argument stands in stark contrast to the government's portrayal of the wireless industry, which paints T-Mobile as a disruptive force whose elimination would lead to higher prices, poorer service and less innovation.

"T-Mobile's business model remains 'stuck in the middle' between larger providers like Verizon, AT&T, and Sprint, and lower-priced competitors like MetroPCS and Cricket," AT&T said in its reply. "Blocking this transaction will not help T-Mobile or its customers, but the transfer of T-Mobile's network capacity and infrastructure to AT&T, a healthy competitor, will enhance competition for all, now and in the future."

The comments give the first indication of AT&T's strategy for fighting the government's lawsuit, which aims to stop the combination of the country's second and fourth largest carriers on the grounds that it would substantially lessen competition.

AT&T's efforts in court will be led by Mark C. Hansen, a partner at Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC. The firm is a litigation specialist and a telecom boutique.

While the two sides square off in court, AT&T is also working on a possible compromise, putting together a package of concessions that could ease the Justice Department's concerns. The package is expected to include divestitures of subscribers and possibly spectrum and network assets.

Both sides have incentives to settle. AT&T would have to pay T-Mobile parent Deutsche Telekom AG $3 billion in cash and turn over another $3 billion or so in spectrum and network access rights if the deal doesn't close. The Justice Department, meanwhile, doesn't want to suffer a loss in court.

But lawyers and economists say it could be difficult to find a compromise that would answer the government's sweeping objections without undermining the economics of the deal.

In its lawsuit, the government said the combination would likely raise prices and hurt innovation in what is already a highly concentrated market. The deal, it said, would substantially lessen competition in 97 of the nation's top 100 markets.

"We don't file lawsuits to posture," Sharis Pozen, the Justice Department's acting antitrust chief, said after a panel at Fordham Law School this week. "We file them when there are violations of the law."

Even before the Justice Department filed suit, AT&T and Deutsche Telekom both expected major concessions would be needed to clear the deal. When AT&T hired Bank of America Merrill Lynch last month to advise it on asset sales, people familiar with the matter said the spinoffs could be worth up to $8 billion based on internal analyses of what might be needed to gain regulatory approval.

If the Justice Department requires divestitures worth more than 20% of the $39 billion deal value, then Deutsche Telekom has to share "the risk" of asset sales under the companies' merger agreement, according to people familiar with it. That in effect could mean AT&T pays less to complete the acquisition.

The agreement also says that if the required divestitures are above 40% of the deal value, then AT&T can walk away from the contract. But it still must pay the fee for failing to complete the deal, the people said.

AT&T is required to pay the fee under most circumstances, including if the deal falls apart for regulatory reasons. The exception would be rare events, not including regulatory resistance, that would qualify as a "material adverse effect."

While AT&T depicted T-Mobile as an ineffective competitor that is losing customers and the support of its parent company, it argued that even smaller upstarts such as MetroPCS Wireless Inc. and Leap Wireless International Inc., as well as regional carriers such as U.S. Cellular and Cellular South, Inc. provide significant competition.

The Justice Department's suit excerpted company documents to show AT&T has repeatedly been forced to respond to T-Mobile's moves. AT&T argued in its reply that the material was taken out of context.

Rival Sprint Nextel Corp. which has opposed AT&T's transaction, said Friday: "AT&T's court filing does not change the facts. This proposed takeover would create a clear wireless duopoly that could raise prices, stifle innovation and cost American jobs."

By: DocMemory
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