AT&T Buy of Dobson Expands Reach in Rural America
AT&T’s acquisition of Dobson Cellular likely faces few regulatory hurdles at the FCC or Justice Department, analysts and industry sources agreed Monday. AT&T announced a deal late Friday to buy Dobson for $2.8 billion. Dobson sells service to some 1.7 million customers under the Cellular One brand. Both use GSM-based technology, simplifying system integration. And Dobson has 850 MHz spectrum well-suited to serving rural areas, analysts said. AT&T and Dobsons hope to close the deal this year.
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Dobson and AT&T are unusually well suited for a merger since their systems do not overlap, posing few regulatory complications, and both use GSM technology, said Susan Eustis of Wintergreen Research. Dobson is the third-largest GSM carrier in the U.S. “AT&T has been under enormous pressure to increase their quality of service,” Eustis said: “Verizon has been making a huge competitive issue out of the quality of their network. This was a really good fit.”
“There’s no obvious problem with it. You'd have to do the market-by-market analysis and determine what the overlap is,” said a regulatory attorney not involved in the merger: “AT&T is enlarging its footprint by adding markets rather than adding capacity where it already has a presence.”
“It should sail through,” said a second attorney: “If there’s no overlap, as AT&T says, there should be no problems.”
“The deal illustrates AT&T’s commitment to lead with its wireless proposition,” Bank of America said in a research note: “On the wireless front, coverage overlap is minimal, creating a substantial value opportunity relative to the size of the merger, particularly in rural regions, where Dobson’s 850 MHz spectrum provides more efficient coverage… AT&T anticipates the competitive environment and limited coverage overlap will facilitate a smooth regulatory approval process, perhaps obtaining approval by the end of ‘07.”
Risks from the coming 700 MHz auction and proposed Universal Service Fund caps impelled Dobson to make a deal, said Jeffries analyst Jonathan Schildkraut. Good only through 2008, Dobson’s roaming deal with AT&T was one AT&T may have dropped in favor of building out its own network with 700 MHz winnings, he said. Potential loss in USF funding to rural wireless carriers could have hurt Dobson, which this year will get $64-$65 million in USF subsidies, he said, adding that AT&T could carve out the Alaska assets, selling them to General Communications.
T-Mobile, another Dobson roaming partner and GSM carrier, likely eyed buying Dobson as well, but AT&T cut them off at the pass, Schildkraut said. AT&T and T-Mobile both want to acquire rural carriers, and “there will be further consolidation,” he said.
Alltel and Verizon Wireless are looking for growth in rural underserved areas, Current Analysis analyst William Ho told us. Verizon acquired West Virginia Wireless in February. AT&T will have problems to address once the deal goes through, Ho said: “Dobson is not yet fully GSM and by no means anywhere near 3G. This means more [capital spending] to take care of that.” But those costs should be deflected, since AT&T no longer will have to pay Dobson roaming fees and will pick up roaming revenue from T-Mobile, he said.
Dobson offers service in parts of Alaska, Arizona, New York, Illinois, Kansas, Kentucky, Maryland, Michigan, Ohio, Minnesota, Missouri, Oklahoma, Pennsylvania, Texas, Virginia, West Virginia and Wisconsin. In late May, TPG Capital and GS Capital Partners agreed to buy Alltel, also primarily serving smaller markets, for $27.5 billion.