Wednesday, March 23, 2011

Breaking up is hard to do

One of the terms that convinced T-Mobile to accept the offer from AT&T rather than other bidders was the large ($3 billion) breakup fee that accompanied AT&T's $39 billion bid. At 7.7%, this breakup fee is huge by typical deal standards -- such fees tend to be in the 2-3% range. For example, Lubrizol, the industrial lubricants company that recently agreed to be bought by Warren Buffett's Berkshire Hathaway, will pay $200 million (2.2% of the $9 billion deal) if the break the acquisition agreement.

If there is a breakup (termination) fee in a deal structure, more often than not it goes to the acquirer if the target walks away from the deal. This fee is intended to reflect the direct and opportunity costs the acquirer incurs such as advisory expenses and executive time spent on the deal. In one study of 1,100 acquisition agreements, 55% of deals included a target breakup fee, whereas only 21% of the deals had breakup fees for both target and acquirer. Targets apparently have greater incentive to break contracts and seek other "lovers".

Technically the fee to be paid by AT&T (acquirer) to T-Mobile (target) upon deal collapse is deemed a reverse breakup fee. The $3 billion sum is not the largest such fee in history in absolute terms. For example, reflecting the difficult credit environment in 2009, Pfizer would have had to pay Wyeth $4.5 billion if it could not get necessary loan approvals to get the deal done. And AOL was on the hook for $5.4 billion if the company walked away from the Time Warner deal. (Time Warner had a reciprocal breakup fee of $3.9 billion on this deal -- in hindsight Time Warner should have bolted and paid this sum to loose itself from AOL's grip.)

However, on a percentage basis ATT's 7.7% breakup bounty tops both the Pfizer and AOL fees. T-Mobile will walk away with this largess (plus some AT&T spectrum) if regulatory authorities such as the DOJ or FCC nix the deal. AT&T's legendary regulatory team will be put to the test as it attempts to convince a hardened antitrust administration that this deal has merit. T-Mobile executives can be more relaxed as they win no matter the outcome.


Sagar said...

Do you think this administration is going to hold up this deal on antitrust grounds? It's hard to imagine it doing so, as it is already under fire for not being sensitive enough to the needs of the business community.

George T. Geis said...

At this point, I'd still put the odds of DOJ/FCC approval at 60/40. However, the recent subscriber/share price meltdown of Sprint Nextel and of second tier providers (such as MetroPCS and Leap) challenge AT&T's argument that wireless will remain an intensely competitive market. The "D" word (duopoly) is surfacing more and more to describe an AT&T/Verizon dominance should the deal be approved.