http://online.wsj.com/article/SB10001424053111904716604576542373831069388.html

SEPTEMBER 1, 2011

Justice Department Sues to Block AT&T's Takeover of T-Mobile

By THOMAS CATAN And BRENT KENDALL

The Justice Department on Wednesday sued to block AT&T Inc.'s proposed $39 billion takeover of T-Mobile USA, saying the combination of the second- and fourth-largest U.S. cellphone companies would hurt competition and likely raise prices.

AT&T defended the deal and said it will "vigorously contest this matter in court."

The antitrust challenge comes shortly after the Obama administration also blocked Nasdaq OMX Group's proposed offer for NYSE Euronext and shows its desire to put new teeth into antitrust enforcement after what it says was lax enforcement under the previous administration.

The deal would create a giant in mobile telephony that AT&T has argued would provide better service to more of the country. But the Justice Department said in its suit that the deal would also remove an important challenger--T-Mobile USA--from the market, reducing pressure on its larger rivals to keep prices down and improve service.

"Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation's wireless carriers, particularly the four remaining national carriers," said Deputy Attorney General James Cole. "This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition."

In a statement, AT&T said it was "surprised and disappointed" by the government's suit.

Wayne Watts, AT&T's general counsel, said the merger was in the best interests of consumers and would allow AT&T to expand its fourth-generation wireless network to 97% of the U.S. population.

The Justice Department left the door open for AT&T to propose remedies to the deal.

"We apprised them of our serious concerns, and as any party can do, our door is open," said Sharis Pozen, the acting chief of the department's antitrust division. "If they want to resolve those concerns, we can certainly do that. Here we filed a lawsuit and we'll proceed in court. We'll see what happens next."

The proposed tie-up has faced opposition from consumer groups and No. 3 carrier Sprint Nextel Corp. since it was announced in March. AT&T's stock was down more than 4% on the announcement, while shares of T-Mobile's parent, Deutsche Telekom AG, fell 7.6% in Frankfurt. Shares of Sprint, which is seen as a likely victim of an enlarged AT&T, rose 6%.

While some observers said AT&T and the government might still reach a settlement, others said the fundamental nature of the Justice Department's objections would set a high hurdle.

"The DOJ did not file this complaint to negotiate," said Dana Frix, a partner at Chadbourne & Parke LLP's Washington office. "For future mergers, this complaint shows a tougher DOJ stance. They are sending a big message."

Roger Noll, a Stanford University economics professor, said the government might be looking to extract further concessions from AT&T, but he said the company can only go so far.

"For AT&T, this deal is about the spectrum, and if they have to give up a bunch of it in big cities, that pretty much defeats the purpose of the merger," said Mr. Noll.

AT&T has a strong incentive to complete the deal. Its merger contract with Deutsche Telekom says AT&T may be obligated to pay a break-up fee of $3 billion in cash if the T-Mobile deal is called off "because of the failure to obtain regulatory approval." AT&T would have to make other concessions to Deutsche Telekom worth an additional $3 billion, making the total break-up cost $6 billion.

The Federal Communications Commission also has been conducting an extended review of the proposed merger. The FCC wasn't as far along with its review, said FCC Chairman Julius Genachowski. But he added that "the record before this agency also raises serious concerns about the impact of the proposed transaction on competition."

The FCC will "continue to work on the review but we won't undermine DOJ's process," an FCC official said Wednesday. The FCC has never approved a deal that the Justice Department has rejected.

Regulators signaled from the start that the deal raised significant competitive questions. Earlier this summer, AT&T tried to address those questions by introducing new economic data that it said showed the deal would boost efficiency.

Ms. Pozen, the acting antitrust chief, said the Justice Department looked closely at all the companies' submissions, but "at the end of the day, taking out an innovator, a value pricer like T-Mobile, caused us concern."

AT&T argued that the deal was in the country's best interest because it would be able to use T-Mobile's towers and airwaves to expand high-speed wireless Internet service across most of the U.S. AT&T also argued that the deal would create new jobs because of expanded broadband access.

On Wednesday, AT&T announced plans to move 5,000 T-Mobile call center jobs back to the U.S. after the deal's completion, in another appeal to regulators. The company's announcement came just hours before the Justice Department filed its lawsuit.

--Amy Schatz, John Jannarone and Greg Bensinger contributed to this article.