AT&T's planned buy of Deutsche Telekom AG's T-Mobile USA will face major demands from U.S. regulators, including extensive asset sales and promises to serve rural areas, but the $39 billion deal is expected to ultimately get a government nod.

The deal gives AT&T -- the No. 2 US mobile service often criticized for dropped calls and slow connection speeds -- additional capacity to meet ever-growing demands for videos and data from devices such as Apple Inc's iPhone.

Deutsche Telekom will get rid of an asset that is declining in profitability.

The proposed deal, announced on Sunday, would make AT&T the new leader with roughly 43 percent of the U.S. wireless market, about 130 million subscribers.

That market concentration 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.

The FCC could go further than the DOJ, asking for expansion of wireless service to rural areas and for service promises including more packages with data roaming.

But regulatory experts interviewed expected the deal to go forward, especially because AT&T agreed to pay an unusually high breakup fee of $3 billion and to give T-Mobile USA wireless airwaves if regulators reject it.

I would expect that DOJ would require divestitures of spectrum and possibly other assets ... in a significant number of local markets, but that won't materially affect the compelling economics of the deal for the parties, said Beau Buffier, an antitrust expert with Shearman & Sterling LLP.

AT&T shares closed up 1.14 percent and Deutsche Telekom closed up 11.26 percent on Monday, as the deal sent reverberations across the telecommunications industry.

Sprint, seen as the loser in the deal, closed down 13.5 percent.

Verizon Wireless, a joint venture of Verizon Communications Inc and Vodafone Group Plc, is the industry leader. A struggling Sprint Nextel is in third with T-Mobile in fourth.

MARKET REVIEW

In general, mergers in industries with expensive infrastructure can be more difficult to approve since the infrastructure means that 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 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. Most estimates of the approval process were that it would take eight months to 18 months.

The 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.

RURAL ROLLOUT

A former FCC official said the agency would try to approve the deal, imposing several competitive concessions on the new entity.

At the very least, he said, the FCC is 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.

An attorney familiar with FCC proceedings said the agency will also be looking for commitments in the merger to expand network coverage to underserved areas and quickly roll out new services.

AT&T said in its release announcing the deal that it would commit to expanding the high-speed 4G LTE network to 95 percent of the United States population, including rural communities and small towns.

(Reporting by Diane Bartz and Jasmin Melvin in Washington, and Sinead Carew in New York; Editing by Bernard Orr)

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