T-Mobile-Sprint Deal Is on Life Support
(Bloomberg Opinion) -- I’m just guessing, but a box of unworn magenta T-Mobile shirts may have just landed in the dumpsters at Sprint Corp.’s headquarters.
In all seriousness, Tuesday delivered bad news for the U.S. wireless carriers: A group of state attorneys general, including from New York, California, Colorado and Mississippi, are suing to block T-Mobile’s $59 billion acquisition of Sprint. The controversial merger, which the companies announced more than 13 months ago, has actually been years in the making, as their owners sought a more favorable regulatory environment to attempt the transaction. But the lawsuit is a setback so large that it wouldn’t be a surprise if the companies soon called off the deal.
The last few weeks have been a roller-coaster ride for shareholders of T-Mobile and Sprint. In late May, the companies made a series of commitments that helped sway Ajit Pai, head of the Federal Communications Commission, to recommend that his agency approve the transaction. But as I wrote at the time, even if the FCC is playing good cop, there was always a chance that the Department of Justice – the other regulator tasked with scrutinizing the merger – would take on the role of bad cop. The pact with the FCC includes divesting Sprint’s Boost Mobile prepaid brand, agreeing to reach certain mileposts for the creation of a next-generation 5G wireless network and promising not to raise prices on customers for three years. But some of the points are difficult to enforce and didn’t go far enough for the DOJ, which was said to be leaning against approving the deal.
The states’ lawsuit means that the final decision now rests not with the DOJ, but with the courts. It’s unusual for them to sue before the DOJ announces a decision, but it could be that the attorneys general are hoping to put pressure on Makan Delrahim, the department’s head of antitrust, to join them in opposing the deal. Blair Levin, an analyst for New Street Research and a former FCC chief of staff, says this could be the message the states are trying to send Delrahim:
If he sides with the FCC, there is a material risk that his principal legacy will be losing in court on a merger he tried to block and losing in court on a merger he tried to let through.
Ouch. The merger Delrahim tried to block refers to AT&T Inc.’s $102 billion takeover of Time Warner, which a judge ruled in favor of one year ago tomorrow. While the DOJ’s concerns about that deal were warranted, the department didn’t build a strong enough case. That trial was also sullied by speculation that President Donald Trump had improperly interfered, looking to settle scores with CNN, one of the assets at stake in the Time Warner deal.
From a consumer standpoint, the issues are even more glaring with a T-Mobile-Sprint merger, as it would reduce the number of national wireless carriers from four to three. Investors have cheered the pricing power it would bring back to an industry that had become highly competitive in recent years, thanks to attractive unlimited plan rates offered by T-Mobile and Sprint as they battled for customers in an attempt to narrow the gap with AT&T and Verizon Communications Inc. In fact, one of the concessions the DOJ reportedly wants is for T-Mobile and Sprint to somehow help bring about the creation of a fourth national operator to fill the hole Sprint would leave behind. That would likely cancel out some of the biggest benefits they would get from merging – especially if that new fourth competitor were to be Amazon.com Inc., which is interested in acquiring Boost, according to a Reuters report.
Without Sprint, T-Mobile would once again become an attractive takeover candidate for any of the host of cable, satellite or technology companies wanting a toehold in 5G, the creation of which the U.S. sees as a critically important race against China (a core argument T-Mobile and Sprint are making). But as for its Overland Park, Kansas-based partner, the absence of a deal would leave a struggling Sprint to go it alone in the U.S. wireless industry short on funds and solutions.
The deal isn’t dead yet, but I wouldn’t count on Sprint’s team sporting magenta t-shirts any time soon.
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Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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