TR Daily Analysts Say T-Mobile, Sprint Face Uphill Climb Getting Approval
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Monday, April 30, 2018

Analysts Say T-Mobile, Sprint Face Uphill Climb Getting Approval

A number of analysts predict that T-Mobile US, Inc., and Sprint Corp. face an uphill climb getting their merger approved, citing factors such as the Department of Justice’s rejection of AT&T, Inc.’s acquisition of T-Mobile, regulators’ past support for having four nationwide wireless carriers, and DoJ’s challenge of AT&T’s acquisition of Time Warner, Inc.

Meanwhile, consumer and public interest groups and Democratic members of Congress expressed concern about the impact consumers and competition would feel if the nation’s third- and fourth-largest wireless carriers were combined as a result of T-Mobile’s proposed acquisition of Sprint.

T-Mobile and Sprint announced the proposed all-stock transaction, which puts a total enterprise value of $59 billion on Sprint, yesterday. They argued that the combined entity, which would carry the T-Mobile name and be headquartered in Bellevue, Wash., where T-Mobile is based, with a second headquarters in Sprint’s home of Overland Park, Kan., “will have lower costs, greater economies of scale, and the resources to provide U.S. consumers and businesses with lower prices, better quality, unmatched value, and greater competition. The New T-Mobile will employ more people than both companies separately and create thousands of new American jobs.”

The companies emphasized that if regulators approve the deal, the combined entity would be capable of deploying 5G services more quickly and deeply than they would be able to individually or that either Verizon Communications, Inc., or AT&T, Inc., could, helping the U.S. lead the world in 5G deployment over such nations as China. They touted the spectrum resources that the combined entity would have, including the 2.5 gigahertz band holdings of Sprint and the 600 megahertz frequencies of T-Mobile.

Deutsche Telekom AG, which controls T-Mobile, would own 42% of the combined entity, while SoftBank Group, which controls Sprint, would own 27%, and 31% would be owned by the public. T-Mobile and Sprint said they expect the deal to close by June 2019.

As is typically the case when companies announce mergers, T-Mobile and Sprint downplayed their previous statements about their plans to deploy 5G services. In particular, T-Mobile has said it plans to deploy 5G nationwide in 2020, which it said would exceed the commitments made by Verizon and AT&T.

“Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the U.S. and answer competitive challenges from abroad,” the companies said in a news release.

The combined entity would invest up to $40 billion in the new network in the first three years and add tens of thousands of jobs, including in rural areas, according to John Legere, who is president and chief executive officer of T-Mobile and would be CEO of the combined company. Mike Sievert, T-Mobile’s chief operating officer, would be president and COO of the combined company, and the rest of the top managers would be selected from both companies.

“Tim Höttges, current T-Mobile US Chairman of the Board, will serve as Chairman of the Board for the new company. Masayoshi Son, current SoftBank Group Chairman and CEO, and Marcelo Claure, current Chief Executive Officer of Sprint, will serve on the board of the new company,” the news release said. The deal contains no regulatory break-up fees and T-Mobile has agreed to provide a four-year roaming agreement to Sprint regardless of whether the merger is terminated.

Mr. Legere acknowledged the concerns of removing a nationwide wireless carrier from the market. T-Mobile and Sprint currently have combined 127 million subscribers, while AT&T has nearly 143.8 million wireless connections, and Verizon has 116.2 retail wireless connections.

“This isn’t a case of going from 4 to 3 wireless companies — there are now at least 7 or 8 big competitors in this converging market. And in 5G, we’ll go from 0 to 1. Only the New T-Mobile will have the capacity to deliver real, nationwide 5G,” Mr. Legere said in the news release. “We’re confident that, once regulators see the compelling benefits, they’ll agree this is the right move at the right time for consumers and the country.”

“We feel confident that this administration and our political leaders across the country understand the potential and the imperative to protect the global leadership established with 4G. It is in this world that we fit perfectly,” Mr. Legere said during a conference call yesterday with reporters and analysts.

Mr. Claure said on the call that the deal “is good for consumers, it’s good for the economy and it’s good for our country.”

In an interview with CNBC today, Mr. Claure stressed the importance of the U.S. leading in 5G deployment and said that “the only way you’re going to be able to build 5G is by combining Sprint and T-Mobile.” In the same interview, Mr. Legere mentioned plans to discuss the deal at the FCC this week.

This is the third time the wireless carriers have sought to merge.

Last year, they ended their negotiations with news reports indicating the sticking point was the unwillingness of Mr. Son to agree to a merger that didn’t call for his company to control the combined entity (TR Daily, Nov. 6, 2017).

In 2014, the companies abandoned an effort to combine after then-FCC Chairman Tom Wheeler told Sprint that he was skeptical of a Sprint–T-Mobile deal, and William J. Baer, then-assistant attorney general–antitrust, said such a merger would be greeted with skepticism by DoJ (TR Daily, Jan. 30 and Feb. 4, 2014).

The FCC and DoJ had no comment today on yesterday’s merger announcement.

Several analysts said T-Mobile and Sprint only have an even chance of getting regulatory approval — at best.

“We reiterate our previous estimate of 50/50 odds,” analysts at MoffettNathanson LLC said in a research note. “Ultimately, the regulatory question comes down to this: will consumer welfare be measured by end-use prices in a four versus a three-player market, or by the level of capital investment the two companies can support as one company, rather than two?”

The analysts said two factors “are working against the companies”: (1) DoJ’s rejection of the AT&T–T-Mobile deal proposed in 2011, and (2) the wireless market’s already highly concentrated state with a Herfindahl-Hirschman Index of 2,700, a number that would jump more than 500 points if T-Mobile and Sprint combine.

“The companies are already testing arguments that Cable should be viewed as a new entrant, but it is unclear whether the DOJ will embrace that argument,” the MoffettNathanson research note added. “At present, the cable operators (really, just Comcast) have de minimis market share. And, more to the point, they are MVNOs (Mobile Virtual Network Operators, or, in layman’s terms, merely resellers). The DOJ is likely to focus on competition at the network layer, not just at the retail layer.”

“Last night, we assumed 50/50 odds in our analysis. Based on trading sensitized to standalone values, it seems that the market is assuming approval odds of less than 20%,” New Street Research LLP analysts said in a research note today. “The deal faces a difficult process at the FCC and DOJ, and there is political risk that further ratchets up the risk of the deal being blocked … . We happen to think the companies have good arguments to present to regulators, and they are better than the arguments presented in 2014; however, we have no confidence that the regulators will accept these arguments. We would stick to 50/50, but we can understand why others may start lower.”

T-Mobile closed down 6.22% today to $60.51, while Sprint was off 13.69% to $5.61.

A recent research note by Blair Levin, an adviser to New Street Research and a former FCC chief of staff, correctly predicted that T-Mobile and Sprint would attempt to make the case that they have the ability to better deploy a 5G network as a combined company that individually.

But he observed that the “companies have made comments that undercut that claim, with both claiming they will be able to compete against AT&T and Verizon’s 5G efforts. The argument is also at odds with a lot of FCC rhetoric (as well as industry statements) suggesting that the major barrier to 5G deployments is municipal regulation. … It would look a bit odd for two big industry players to in effect argue that that which they said was the big barrier was actually just a minor one but the real barrier is market structure.”

Mr. Levin also suggested, correctly, that the companies would argue that it’s in the U.S.’s national security interest to lead the world in 5G deployment over countries such as China. U.S. officials have reportedly discussed whether the U.S. government should build a nationwide 5G network that is secure against hackers and ensures that the U.S. effectively competes against China in the Internet of things ecosystem (TR Daily, Jan. 29).

But Mr. Levin added, “The presence of Softbank raises a risk — not unlike the Broadcom/Qualcomm situation — of some seeing the deal as a Trojan Horse for Chinese influence over a critical network asset.”

Mr. Levin also said he wouldn’t be surprised “if the deal is announced simultaneously with commitments on jobs, prices and investment …” He also said that states may also decide to sue to block the merger.

“We believe there is less than a 40% chance the deal will be approved by regulators, as it is currently positioned,” Walter Piecyk, an analyst at BTIG LLC, said in a blog posting. “There is clearly much higher uncertainty with the current administration which could end up being a benefit to deal approval. However, uncertainty is not typically favorable for how investors discount the probability of a transaction closing.”

“T-Mobile provided no indication that it was willing to either sell spectrum or offer an attractive wholesale agreement to cable operators in order to appease regulators,” Mr. Piecyk added. He added that it is “hard to see how regulators would consider a cable MVNO as an incremental competitor in the market when they have not considered TracFone, a MVNO with 23 million customers, in the past. It is also well known that the scope of Comcast and Charter’s MVNO agreement is limited. We believe Comcast and Charter are more interested in building a wireless network on top of their fiber rather than simply securing an MVNO agreement with companies in the process of expanding their network.”

Analysts at Wells Fargo Securities LLC downgraded T-Mobile and Sprint to market perform from outperform.

“The message from our regulatory contacts was simple — ‘this won’t be easy,’” they said in a research note. “While we believe the messaging itself is quite compelling — job creation, infrastructure investment to keep up with China, the wireless industry moving beyond 4 players, etc. But the numbers become harder when looked at purely from a market concentration standpoint. The DoJ looks very hard at the HHI (Herfindahl-Hirschman Index) as the accepted measure of market concentration.”

Roger Entner, founder of Recon Analytics LLC, told TR Daily, “The fate of this merger depends on jobs. Of the $6 billion savings per year, 93% is Opex. At least $2 billion of the opex savings come from sales, marketing, advertising, IT and administrative cost savings, which typically means job losses. If regulators look at the job situation in a narrow way then it's difficult to see how this merger would create net jobs. The larger you draw the circle of what jobs you count, the easier it is to see that it helps with jobs. 5G will create millions of jobs. The question is who can take credit for it and will regulators give T-Mobile credit for them. It is critical for T-Mobile and Sprint to get the credit for creating these jobs in the overall 5G economy. The Trump Administration has been a strong and consistent defender of American jobs and American companies. It is hard to see how regulators will allow a merger that lays off tens of thousands of American workers in order to allow a German and Japanese company to compete better with two American companies. So in the end, this is about jobs.”

Moody's Investor Service said it “believes that the combination of T-Mobile US and Sprint will substantially improve the combined company's cost structure, enabling it to invest in its network as the company prepares to develop capacity for 5G technology applications.” But it added that “the process of integrating the two networks is the primary risk factor that could negate the potential benefits of the merger. If the integration work results in a deterioration in service quality as T-Mobile migrates Sprint customers to the T-Mobile network, churn would increase and New T-Mobile would suffer damage to its newly defined brand and reputation operating as a combined company. The combined effects of increased churn and lower share of gross adds could pressure New T-Mobile's revenue and cash flow.”

Rich Young, a spokesman for Verizon, said the carrier remains “focused on providing customers with the most reliable 4G network as we build them the world's first and best Ultra-Wideband 5G network — not just a proposal that may or may not happen in the next couple of years. As we've seen time and time again, there's Verizon's network and then there’s all the rest.”

AT&T declined to comment.

Democrats in Congress and public interest and consumer groups expressed concern with the merger.

Reps. Frank Pallone Jr. (D., N.J.) and Mike Doyle (D., Pa.), the respective ranking members of the House Energy and Commerce Committee and its communications and technology subcommittee, wrote their Republican counterparts today seeking a hearing on the proposed transaction.

“The merger would create a new wireless behemoth by shrinking the number of nationwide wireless providers from four to three. The transaction would directly affect the 120 million wireless subscribers for the two companies, but it would also trigger ripple effects for everyone who uses a mobile phone. Considering that the combined company would be overwhelmingly controlled by foreign entities, this transaction also raises significant questions about foreign control of major players in the U.S. wireless market,” the lawmakers said. “This Committee has spent significant time studying the overhaul in the wireless market as it transitions to fifth-generation (5G) infrastructure. … Yet, we have not held a single hearing to examine the state of competition as the industry makes this change or how a loss of a competitor could affect consumers or workers.”

“This merger by T-Mobile and Sprint raises serious antitrust issues, and is exactly why I urged the FCC and DOJ to investigate a potential merger last year,” said Sen. Amy Klobuchar (D., Minn.), ranking member of the Senate Judiciary Committee’s antitrust, competition policy and consumer rights subcommittee. “Competition among the four largest cell phone carriers has led to lower prices, better service and more innovation. I remain concerned that increased consolidation could undermine benefits to consumers.”

“Consumers in the wireless market have benefited greatly from fierce competition over the last few years. Variety in the wireless market and the presence of strong competitors like T-Mobile have forced carriers to offer better prices and services. As the next generation of technologies arise[s], consumers and our economy need more competition, not less,” said Sen. Richard Blumenthal (D., Conn.), who, like Ms. Klobuchar, sits on both the Senate Commerce, Science, and Transportation and Senate Judiciary committees. “Shrinking the number of major carriers from four to three certainly rings alarm bells. I will scrutinize this merger closely to ensure that consumers and workers — and not just shareholders — benefit from what would be a significant consolidation in the wireless market.”

Jonathan Schwantes, senior policy counsel for Consumers Union, said, “This merger raises several red flags for consumers. If the national wireless market shrinks from essentially four companies to three, history suggests the negative impact on competition would mean higher prices for many people. Right now, Sprint and T-Mobile provide much-needed alternatives to Verizon and AT&T, with some innovative plans and pricing options that keep some semblance of competition alive. If you combine these two companies, those incentives and options could dry up, and people could see prices shoot up, not only for monthly service plans, but for equipment prices as well.”

Mr. Schwantes added, “Compared to industries like cable, wireless is the rare telecommunications market with at least a few comparable choices for consumers. Head-to-head competition leads to direct benefits for consumers, like unlimited data offers and low-cost equipment lease plans. The question is whether those consumer choices fade away and disappear if this merger is approved.”

Free Press Policy Director Matt Wood said, “Unlike good wine or a good movie, this long-rumored deal only gets worse with age and repeat viewings. No one but T-Mobile and Sprint executives and Wall Street brokers wants to see this merger go through. Greed, and a desire to reach deeper into people’s wallets by taking away their choices, are the only things motivating this deal. What we know about the wireless market is that customers actually win when mergers are blocked. That market has been relatively competitive in recent years, but only because the FCC and DOJ signaled they would block AT&T’s attempted takeover of T-Mobile in 2011, along with T-Mobile and Sprint’s several previous attempts to combine.

“T-Mobile and Sprint separately have each exerted important competitive pressures on the wireless market, pushing each other and AT&T and Verizon to do things they otherwise wouldn’t — like offering uncapped data plans and dropping burdensome contract requirements. These moves have given people more choices and fairer prices,” Mr. Wood added. “Maintaining competition from and between T-Mobile and Sprint is particularly important for lower-income families and people of color, many of whom rely on mobile as their only home-internet connection. If T-Mobile and Sprint merge, prices will spike and the digital divide will widen. The notion that this deal would produce better wireless services is a flat-out fiction. We’ve seen the results from the tax cuts and other destructive deregulation in the Trump era. The combined entity here would just use this deal to line its own pockets, pay down the massive debt these companies carry, and reward shareholders with more stock buybacks. It would fund further acquisitions of content companies, too, as wireless carriers like Verizon and AT&T rush to join the race for targeted advertising revenues built on privacy abuses like those already built into Facebook and Google’s ad models.”

“Sprint and T-Mobile will be hard pressed to demonstrate how their combination would benefit the public interest. This task proves increasingly difficult when a merger drastically reduces competition in the wireless marketplace, as this combination certainly will,” said Phillip Berenbroick, senior policy counsel at Public Knowledge. “If approved, this deal would especially hurt consumers seeking lower-cost wireless plans, as the combined company’s plans would likely increase while competitors AT&T and Verizon would have even less incentive to lower prices. Unless the merging parties can demonstrate clear competitive benefits we have yet to see, we will urge the Department of Justice and the FCC to reject this deal.”

Alex Nogales, president and CEO of the National Hispanic Media Coalition, said, “When the FCC and DOJ analyze the Sprint and T-Mobile merger filing, we ask them to protect Latinos and low-income consumers so that they are not disproportionately harmed by increased prices associated with market consolidation. In an already anti-competitive market, it is deeply concerning that this merger would leave consumers with only three choices in wireless providers. Consumers need more choice and competition, not less. Sprint and T-Mobile have a lot of work to do to prove that this merger is in fact in the public interest.”

John Windhausen Jr., executive director of the Schools, Health & Libraries Broadband (SHLB) Coalition, said, “The announcement by Sprint and T-Mobile that they intend to merge raises a host of important questions for anchor institutions and for consumers. How will this merger affect the delivery of data services to low-income students, especially those using the 2.5 GHz (EBS) band of spectrum? Will this merger promote greater or lesser investment in 5G networks serving anchor institutions? What effect will the merger have on consumer prices? The SHLB Coalition encourages the Department of Justice to examine whether this merger will promote or harm competition, and encourages the Federal Communications Commission to examine the merger closely to see if it meets the public interest.”

“For too many years two powerful companies have dominated much of the mobile phone market. Thankfully in recent years both Sprint and T-Mobile have improved the market by offering innovative and alternative mobile phone deals to consumers. This competition has served consumers well and the key question which must be addressed is whether this merger will result in a more or less competitive market and allow consumers better choices. It is thus very important that an in-depth review of this merger be undertaken by the appropriate government agencies,” said Ed Black, president and CEO of the Computer & Communications Industry Association.

“While the combination of the third and fourth largest companies should be expected to receive great scrutiny, historical, unique, and important aspects of this market make such review imperative,” Mr. Black added. “Whether the merger will result in a market with a stronger third company continuing to put competitive pressure on its two large rivals or a less dynamic market, the merger proposal will need to be the focus of analysis. Along with the regulators we look forward to seeing more details about the proposal in the coming months, and expect to review the justifications and arguments pro and con with great care.”

Mr. Wheeler also weighed in today, saying, “The companies are proposing sacrificing the known consumer benefits of lower prices and expanded services for the unknown of 5G, which both companies had previously said they intend to offer and be fully competitive.”

But TechFreedom said that approval of the T-Mobile–Sprint deal would be good for consumers.

“This merger probably would have happened years ago if the Obama-era FCC hadn’t been so fixated on keeping four national players in the market,” said TechFreedom President Berin Szóka. “Given Sprint’s steadily shrinking market share and T-Mobile’s modest gains, there’s just no evidence for the idea that having two weak companies in lanes three and four is better for consumers than having a stronger third competitor. Just the opposite: Wireless carriers have already invested hundreds of billions of dollars in their networks, but they’ll have to make huge increases in overall investment to build out the network of small cells needed for next-generation 5G service. Analysts estimate that, by 2026, there will be five times as many 5G small cells as there are wireless towers today. Sprint and T-Mobile have lagged behind AT&T and Verizon in deploying 4G networks. The combined company will be able to keep up far better.”

Mr. Szóka added, “While there’s nothing magic about the number four, this merger doesn’t necessarily mean the U.S. will only ever have three nationwide carriers. Cable companies are currently testing 5G networks of their own. They’ve already built huge wi-fi mesh networks. They may yet offer something that many consumers will consider a viable alternative for one of today’s wireless networks. Google has toyed with, but abandoned, plans to provide 5G service from drones, but there’s no telling what the company, or Facebook, might do in the future. Google’s Project Fi, which resells service on the T-Mobile and Sprint networks, combined with wi-fi hotspots, illustrates how the wireless market is still evolving.”

Randolph May, president of the Free State Foundation, said, “While I’m not prepared to take a bottom-line position on whether this merger ultimately should be approved or not, I certainly don’t agree there should be any iron-clad rule, like the one Obama Administration FCC Chairman Tom Wheeler articulated, against going from four to three nationwide mobile providers. That is the wrong way to analyze the market, especially when mobile broadband increasingly is not a distinct market but rather part of a larger dynamic broadband market and when a merger of the third and fourth carriers in terms of the number of subscribers likely would make a more formidable competitor to the two largest wireless providers.”

Competitive Carriers Association President and CEO Steve Berry said, “We are at beginning of the merger process and the various government agencies will focus on the challenges, advantages and benefits of a combined entity for the American consumers in rural and urban areas alike. Each CCA member will decide what is in its own best interest. CCA also will evaluate the challenges and benefits of the potential merger and will seek input from our collective membership. Sprint and T-Mobile are competitive carriers and also CCA members because they share many of the policy goals and complementary relationships with smaller carriers. These relationships will inform the individual member positions regarding the potential merger. It would be wise not to prejudge this transaction until we have more details. We look forward to learning more as the process unfolds.”

Eric Graham, senior vice president–strategic relations for C Spire Wireless, Inc., another CCA member, said, “Sprint has long been an ally of mid-sized and smaller carriers in the wireless industry. A combined T-Mobile and Sprint might benefit millions of consumers, including not only customers of the combined company but also those served by other competitive wireless carriers. We look forward to learning more details about the proposed transaction in the days to come.” —Paul Kirby, [email protected]

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