By Diane Bartz and Jasmin Melvin
WASHINGTON (Reuters) - AT&T Inc will likely be forced to sell major assets and pledge to expand service to poor areas to get approval from the U.S. government for its $39 billion deal to buy Deutsche Telekom AG's T-Mobile USA.
Antitrust experts say the merger, which will create the largest U.S. wireless service provider, faces a tough review by competition and communications regulators that could take as long as 18 months, but that it will ultimately be approved.
The deal gives AT&T -- the No. 2 U.S. mobile service often criticized for dropped calls and slow connection speeds -- more capacity to meet ever-growing demands for videos and data from devices such as Apple's iPhone.
It will have about 130 million customers and hold roughly 43 percent of the U.S. wireless market, a concentration that sparks major regulatory concerns. Both the Federal Communications Commission and the Justice Department could force the combined entity to give up precious assets, including chunks of U.S. airwaves, known as spectrum, experts said.
The FCC could go further than the DOJ, asking for AT&T to expand wireless service to poor and rural areas, and for service promises including more packages with data roaming.
"I would expect that DOJ would require divestitures of spectrum and possibly other assets ... in a significant number of local markets," said Beau Buffier, an antitrust expert with Shearman & Sterling LLP. He added, however, that that won't materially affect the economics of the deal for the parties.
Sen. Amy Klobuchar, a Minnesota Democrat who has criticized wireless carriers for failing to serve rural areas, on Monday urged the government to "take a close, hard look" at the deal.
"Although this deal may spark innovation in the wireless industry, I remain concerned that increased concentration will, at the same time, lead to fewer choices, higher prices and reduced service for wireless consumers," she wrote to FCC Chairman Julius Genachowski and Christine Varney, the head of the Justice Department's antitrust division.
Representative Henry Waxman, ranking member of the House Commerce committee which oversees telecommunications issues, also expressed concern about the deal.
Both the Senate and House of Representatives Judiciary Committees are expected to hold hearings to discuss it.
Despite these concerns, regulatory experts interviewed by Reuters said they expected the deal to go forward. AT&T has agreed to pay an unusually high breakup fee of $3 billion and to give T-Mobile wireless airwaves if regulators reject it.
AT&T shares closed up 1.14 percent and Deutsche Telekom closed up 11.26 percent. The German telecoms operator said it would focus on organic growth and return cash to shareholders after the deal.
In general, mergers in industries with expensive infrastructure can be more difficult to approve since it's unlikely that new competitors would easily emerge.
"This is a business where there is a lot of infrastructure," said Evan Stewart, an antitrust expert with Zuckerman Spaeder LLP. "I'd be very very surprised if the DOJ antitrust division didn't made this very, very difficult."
Past antitrust assessments in this and similar industries have analyzed potential deals on a market-by-market basis, with divestitures expected in any geographical area that would be left with just two national carriers.
Asset sales may also be required in areas left with three national carriers, said an antitrust expert with extensive experience with telecommunications mergers.
"Any city-by-city issues can probably be fixed by divestitures," said Bernard Nigro, an antitrust expert with the law firm Fried Frank. He predicted that the deal could be approved within six months if the parties were willing to negotiate with the FCC and Justice Department.
"But if the issues are more complex it could take a year," Nigro said.
A lengthy review period and the expensive transaction was enough for Moody's Investors Service and Fitch Ratings to place AT&T's debt under review for possible downgrade.
AT&T has said that it would commit to expanding its high-speed 4G LTE network to 95 percent of the United States population, including rural communities and small towns.
A former FCC official said the agency would try to approve the deal, imposing several concessions on the new entity.
At the very least, he said, the FCC was likely to mandate a divestiture of spectrum, the invisible infrastructure needed for wireless services, in markets where the two merging parties control a significant portion of the airwaves.
The FCC could also demand a commitment to open Internet traffic rules and require a joint AT&T/T-Mobile to offer greater data roaming and wholesale access.
(Reporting by Diane Bartz and Jasmin Melvin in Washington, and Sinead Carew in New York; Editing by Bernard Orr)