T-Mobile's consolation prize: Will it be enough?

The ailing carrier didn't get to merge with AT&T, but it is getting a hefty breakup fee. Now let's see if the cash, spectrum, and more make any actual difference.

T-Mobile's parent company, Deutsche Telekom, may be losing out on $39 billion from its failed attempt to merge with AT&T, but on Tuesday the company gave a bit more detail on its consolation prize.

AT&T, T-Mobile's broken merger
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But will the breakup fee be enough to save T-Mobile?

On Monday, AT&T announced that it had ended its pursuit to buy T-Mobile . The company said it decided to pull the plug after it became clear it could not persuade regulators of the benefits of the merger.

While the dissolution of the deal leaves AT&T without much-needed spectrum to keep up with demand for wireless data services, it will leave T-Mobile with the fruits of one of the largest breakup fees associated with any merger. The fee includes a cash payment to Deutsche Telekom of $3 billion, which is expected to be paid by the end of the year. It also includes a large package of mobile communications spectrum and a long-term agreement on UMTS roaming within the U.S. for T-Mobile USA, all of which is worth about $1 billion.

Deutsche Telekom made public the spectrum arrangement in a press release on Tuesday. As part of the breakup deal, T-Mobile USA will get spectrum in 128 markets, including 12 of the top 20 markets. These markets include Los Angeles; Dallas; Houston; Atlanta; Washington, D.C.; Boston; San Francisco; Phoenix; San Diego; Denver; Baltimore; and Seattle.

As for the roaming agreement, T-Mobile will be able to roam onto AT&T's network for more than seven years. Deutsche Telekom said this will allow T-Mobile to significantly improve its footprint in the U.S. and offer better broadband coverage. Specifically the company will be able to increase its network coverage from 230 million potential customers at present to 280 million.

"As a result of the agreement with AT&T, coverage will be extended to many regions of the U.S. in which T-Mobile USA previously had neither its own high-speed mobile communications network nor the associated roaming agreements," Deutsche Telekom said in a statement.

In a separate blog post, Jim Alling, chief operating officer of T-Mobile USA, assured customers that T-Mobile is committed to continuing to provide its service.

"Our focus is unchanged: make the latest mobile products and services affordable for everyone," he said in the blog.

Even with the additional $3 billion in cash, which can be used to help pay down T-Mobile's debt, and the additional spectrum that will fill some holes in T-Mobile's network, there is no question the carrier is still in trouble. While other major carriers have been adding customers over the past year, T-Mobile has been losing them.

Not only is the company finding it difficult to keep up with the bigger AT&T and Verizon Wireless, it's also getting squeezed on the low-end by smaller players, such as MetroPCS and Leap Wireless. These companies offer prepaid service plans targeted at the same price sensitive customers as T-Mobile's base.

Hal Singer, managing director at Navigant Economics in Washington, D.C., says it's these low-end providers that are driving T-Mobile to lower its service plan pricing. And despite the Justice Department's and Federal Communications Commission's hopes of a strong fourth or even fifth player in most markets, he doesn't see a way for T-Mobile to survive on its own.

"The assets and the cash don't make an effective strategy alone," he said. "What T-Mobile needs is a backer that is committed to investing in its future, which includes a 4G LTE network."

He added that he doesn't see T-Mobile's parent company, Deutsche Telekom, stepping up to make further investments. Deutsche Telekom's chief executive, Rene Obermann, acknowledged that T-Mobile needs more investment, according to a New York Times blog post.

But the executive stopped short of promising reinforcements from the parent company. "With the spectrum we're getting, we have a better chance of expanding the network in many markets," The New York Times reported Obermann as saying during a conference call with reporters. "That is not a final solution. In the long term, we need more spectrum and network capacity. We are working on that."

 

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