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Deutsche Telekom's stock slumped on the news that the US Department of Justice had filed suit to block the sale of its T-Mobile USA arm to AT&T. The deal could be resurrected with significant concessions, but the German giant has to face up to the prospect that it is dead in the water - and it appears to have no credible back-up plan.

According to Bloomberg, DT has not prepared a 'plan B' in the event of the $39bn AT&T merger falling through, and expressed itself "surprised" at the DoJ action. Its shareholders know that there are few other options for the US arm, and none as good as the AT&T deal, even with the consolation prize of a record break-up fee valued at up to $7bn.

The dilemma for T-Mobile is that the DoJ opposes its takeover because it wants to preserve robust competition in the wireless market, but there are increasing signs that the fourth cellco may be in no position to provide that. Even since the announcement of AT&T's takeover, it has struggled against falling market share and ARPU, and probably look less attractive to other potential acquirers.

So DT could be lumbered with its US arm for years to come, which will force it to rethink some of the investments it had planned to make with its windfall, particularly in strengthening its core European activities. In any event, while AT&T fights it out, DT will face a longer than expected wait for resolution in the US, reducing its options to become more competitive in saturated Europe, and probably forcing T-Mobile USA to rely heavily on its main area of strength, the prepaid market. Here it has the advantage of an underused new network, but the impact on margins and the company's perceived value could be severe.

Of course, a deal with AT&T may still be done, and the DoJ has left the door open for the operator to suggest remedies to make the takeover more acceptable, but many antitrust lawyers believe it has little real room for manoeuvre and will need to fight for its prey with an expensive and prolonged series of legal battles, rather than negotiation on terms. Its hopes will lie with US District Judge Ellen Segal Huvelle, who will hear the DoJ's case, and who has ruled against the antitrust agency on previous occasions - notably in 2001 when she allowed SunGard to acquire Comdisco's disaster recovery business in the teeth of DoJ opposition.

If the acquisition is finally blocked, T-Mobile will be an even weaker fourth player than it is now, and it is doubtful whether it has sufficient spectrum, cash and brand value to go it alone in 4G, although it will be bolstered by the break-up fee, which will bring it additional spectrum, a roaming agreement with AT&T, plus some of the $3bn cash involved.

A merger with Sprint - or at least a partnership around the Network Vision multi-technology build-out and the wholesale activities with Clearwire and LightSquared - is the obvious route to go. However, the DoJ is keen to keep numerous competitors in play, and could object to a Sprint/TMo/LightSquared/Clearwire coalition - even if Sprint could rustle up the funds and the management clarity to execute a takeover, bearing in mind the huge problems that the Nextel purchase brought with it.

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