Public Regulatory Skepticism on Sprint/T-Mobile Pre-Deal Called Unusual

In a Jan. 22 speech in Stanford, Calif., Deputy Assistant Attorney General Renata Hesse said AT&T’s failed buy of T-Mobile would have eliminated “a company that has been a disruptive force through low pricing and innovation.” One week later, Assistant Attorney General Bill Baer, head of the Justice Department’s Antitrust Division, said after the AT&T/T-Mobile was blocked in 2012, T-Mobile “announced a $4 billion investment in modernizing its network and deploying 4G LTE service” then “made a series of moves to offer cheaper and better customer contracts, including offering plans without annual contracts and selling Apple’s iPhone 5 on better terms than the competition.”

FCC Chairman Tom Wheeler met with Sprint Chairman Masayoshi Son and CEO Dan Hesse Monday and made clear he was also skeptical about the benefits of Sprint/T-Mobile, though he would evaluate any proposal based on the merits and FCC experience to date (CD Feb 4 p13). The meeting had been sought by the Sprint executives so they could lay out the parameters of a possible deal, agency officials said.

"It’s much easier if you don’t want a deal to go through to try to have it never be announced, than have to go through the entire process, and if you're the Justice Department and if you're the FCC, refer for hearing,” said a former FCC legal adviser who does not represent wireless clients. “You'd rather it die before it ever got” before the regulatory agencies, the lawyer said. “It’s smart. It saves people a lot of time. The downside is you haven’t really looked at something on the merits. They haven’t filed something, so some people might see it as quite premature.”

"There are obvious concerns about this sort of ‘regulation by raised eyebrow,'” said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. “It certainly feels like a short-circuiting of our democratic processes. The DOJ has a clear merger review process, and these decisions should be based on hard economic data, not the rhetoric of officials. That said, these sorts of signals can be incredibly efficient -- some think that Sprint may have circulated these rumors with the hopes of feeling out exactly these sorts of reactions. If that is true, and Sprint decides not to pursue a deal, it can make that decision on the cheap. As AT&T has shown, that decision can otherwise be a very expensive one.” AT&T had to give up billions of dollars worth of spectrum and cash as part of a breakup fee to T-Mobile after the companies abandoned their deal.

Daniel Lyons, assistant professor of law at Boston College, said the signals being sent by regulators before the deal is announced are understandable, but still potentially troubling. “I can understand why regulators are sending out feelers now -- if there is a high likelihood that a deal will face opposition, it’s more efficient to signal that before the parties spend time and money on a deal, and to suggest that they approach the agency from the outset with some concessions, rather than wait for the agency to request them,” Lyons said. “Because markets generally abhor uncertainty, there may be some demand from the companies and investors for an early read on how a deal will be greeted and what might be done to merit a more favorable response."

Certainty comes with a price, Lyons said. “Whether a deal is good or bad for consumers will turn on the specific terms of the transaction, which has not yet been proposed,” Lyons said. “And it should be based on rigorous analysis that has not yet been completed. Just as we do not want judges deciding a case before hearing all the facts, regulators generally shouldn’t prejudge whether a deal is anticompetitive before analyzing the specific facts of the case. Merger approvals have formal procedures in place that give all affected parties the chance to prove whether a deal is pro-competitive or anticompetitive. That process is suspect if the agency is viewed as less than impartial. And if there are anticompetitive concerns that can be alleviated, it’s better for the agency to pinpoint the problem and propose a solution during the merger approval process, rather than have the parties guess what might be wrong and what might be an appropriate fix before seeking approval."

Preemptive warnings from regulators about possible mergers are “not unprecedented, but it’s unusual, which is one of the reasons why the deal would face an uphill battle in Washington,” said Guggenheim Partners analyst Paul Gallant. He noted that in 1997, then-FCC Chairman Reed Hundt declared that a speculated AT&T/SBC deal was “unthinkable,” which “pretty much killed the deal before it was proposed.” Still, earlier resistance to a speculated Sprint/T-Mobile merger “didn’t seem to discourage Sprint, so they may still end up pulling the trigger on the deal despite this recent round of cautionary statements from regulators,” Gallant said.

Son Would Have Tough Road Ahead

Son, whose SoftBank bought Sprint last year, had to know winning approval for a takeover of T-Mobile wouldn’t be easy, said Walter Piecyk, analyst at BTIG. “Most investors think Masa faces long odds in getting a deal done but many will be quick to change their minds as soon as he announces a deal,” Piecyk said. “Masa was aware of the scale dynamics of the industry when he bought Sprint. Investors are well aware of the impact that [T-Mobile CEO] John Legere has had on the industry and the challenges that presents to getting a deal through regulators. I can only help but wonder if the apparent pre-emptive strike by regulators is a sign that they think they might have difficulty blocking this deal in front of a judge."

A third industry analyst said if the preemptive strike of regulators is unusual, it’s also unusual for a company to meet with the chairman of the FCC on a deal before it’s proposed, as Son and Hesse did this week. “It’s very unusual,” the analyst said. “I can’t think of when that has happened.” The early meeting likely reflects Son’s impatience with the U.S. regulatory process, which came through when SoftBank was buying Sprint, the source said. “He just wants to plow ahead and I sense this is coming straight from him,” the analyst said of Son. “He wants to get this done."

"I have never seen both the antitrust agency and the FCC make such clear and unequivocal public remarks about their skepticism that a deal could be approved,” said Public Knowledge Senior Vice President Harold Feld. “It is quite clear that both DOJ and the FCC regard T-Mo’s continued innovation in the market (and AT&T’s competitive responses) as a complete vindication of their insistence that the wireless market needs four-firm competition to remain competitive. To the extent that Deutsche Telekom and Wall Street investors claim they were surprised last time, they can have no illusions this time around.” Few are lining up to support the deal, Feld said. “What is also noteworthy is the complete absence of any support for such a deal from [Capitol] Hill or even the usual free market think tanks. No one has complained about the Obama administration ‘pre-judging the outcome’ or ‘dictating to the market,'” he said. “Even Wall Street firms that usually cheer excitedly at the thought of any big merger have reacted to this with the same enthusiasm as Broncos fans did to the start of the 4th Quarter of last Saturday’s Super Bowl. No one other than Sprint seems excited about this."

Jeffrey Eisenach, a visiting scholar at the American Enterprise Institute, also sees the early signaling on the deal as raising questions. “It is reasonable to raise the question, in the absence of even the beginnings of the kind of in-depth analysis that would get conducted during a merger review, let alone any kind of adversarial process … both sides getting to state their case, in the absence of that, how comfortable can you be reaching conclusions ahead of the analysis,” he said. “It’s a fair question.” Eisenach said regulators made similar kinds of statements on two recent proposed deals, American Airlines/US Airways, which was successful, and AT&T/T-Mobile. “They look alike in terms of the statements coming from antitrust enforcers and one of them ended up going through and one of them didn’t,” he said. Sprint and T-Mobile have by some news accounts been out front asking the question about the viability of a transaction, he said. “It creates a little bit of license for the regulators to respond to questions and Lord knows they're getting asked.”

"DOJ and the FCC surprised AT&T and T-Mobile and many in the marketplace when they moved the goalposts midgame for mergers from the established precedent of at least three competitors in a market to at least four,” said Scott Cleland, chairman of NetCompetition, which includes AT&T as a member. “It appears this time, as T-Mobile considers a do-over with Sprint, the DOJ and FCC do not want another surprise -- they are signaling clearly that they intend to keep the goalposts where they moved them -- to at least four competitors in the market not three.”

Rick Boucher with Sidley Austin, a former Democratic member of the House from Virginia who chaired the Communications Subcommittee, said any proposed deal would raise the bigger issue of the FCC’s role in overseeing transactions. “The FCC should not be making independent judgments where the role for making those judgments from a competition perspective is assigned to another agency” like DOJ, he said. “It is duplicative and it often results in conditions being imposed on mergers that really have nothing to do with promoting competition, that relate to whatever the FCC wants to add as a corollary condition. It seems to me that the time really has come to acknowledge the role of the competition authority in these matters rather than the FCC.”(hbuskirk@warren-news.com),