PhillyDeals: AT&T tries to sell T-Mobile purchase as pro-consumer

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Pennsylvania Auditor General Jack Wagner, right, and Michael Masch, chief financial officer for Philadelphia School District, disagree over how big a financial hit the district took to buy out interest-rate swap contracts.

AT&T's proposed $39 billion purchase of Deutsche Telecom's T-Mobile would give mobile-phone users fewer choices. So AT&T will try to dress it up and make it look like it helps consumers, somehow.

Among the political arguments AT&T is making to appeal to Obama's Democrats: that the deal will expand smartphone service to rural areas; that the combined workforce is likely to be represented by labor unions, and that merger cost-cutting could allow the companies to drop smartphone rates, "something that they would likely be willing to promise as a regulatory condition," Craig Moffett, telecom analyst at Bernstein Research, writes in a note to clients.

Who else may fight the deal? Surviving rival Sprint, which will have to raise more money if it wants to compete; communications-tower owners; and makers of wireless phones, Moffett adds.

It's also bad news for retail salespeople and landlords, writes Janney Capital Markets analyst David Strasser: "There will be store closures."

It should take six months to a year for the Justice Department and the FCC to review the deal with a "rigorous, extremely fact-intensive examination of the effect of the deal on consumers" and on local wireless competition, says Michael Weiner, cochairman of Philadelphia law firm Dechert L.L.P.'s antitrust group.

 

Time to cut?

It's bad enough, says Pennsylvania Auditor General Jack Wagner, that the cash-strapped Philadelphia School District, with mass layoffs looming, had to pay $63 million last fall (on top of previous losses) to buy out interest-rate swap contracts that enriched Wall Street firms at taxpayers' expense.

It's worse, he says, that the school district is saying the damage wasn't all that bad.

In the early 2000s, the district bought interest-rate swaps from big Wall Street banks to protect against rising interest rates. But when U.S. rates went down instead of up, the district ended up owing the banks money, instead of the other way around.

According to the district, swaps saved $28 million, compared with what fixed-rate debt would have cost without them over the years. The swaps and the bonds they were supposed to insure have been replaced with cheap, variable-rate debt at a 2010-12 savings of $25 million, district CFO Michael Masch said. That makes the $63 million loss look less bad.

But that second saving "is a mere illusion" because it is likely to be at least partly wiped out by rising interest rates, Wagner says.

Masch insists that the $25 million represents net present-value savings over the cost of the refinanced debt, and that savings could rise if interest rates stay low.

But veteran bond trader Scott A. Fairclough, a principal at Topstone Capital Advisors in New York, tells me the district didn't solve its problem when it terminated the swap, because it locked in past losses and left itself at the mercy of rising rates.

Since Pennsylvania helps fund Philadelphia schools, the district should have been able to borrow more, if it needed money, "at a reasonable rate," so it could have waited until interest rates rose and it could end the swap more cheaply, he said.

It's as if, with Gov. Corbett cutting local school budgets, the district figured it was better cutting its exposure to the swaps as soon as possible.

 

Wawa wins one

Lower Moreland commissioners voted, 4-1, last week for a revised plan that would permit a Wawa at Red Lion Road and Philmont Avenue. They hope the 12-bay gas station and mini-market will revitalize a former machine-shop neighborhood along Pennypack Creek in Huntingdon Valley and ease the township's property-tax burden.

Planners still need to review the proposal. But the vote was a welcome sign for Wawa, the Wood family's Delaware County-based chain, which faces increased local resistance as its stores grow from Cokes and smokes and hoagies to gasoline.

 


Contact Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.