T-Mobile/Sprint Still Might Face Tough Road to Approval
T-Mobile's buying Sprint is expected to face an uphill fight winning approval from regulators, despite what's seen as a positive Senate hearing last week with top executives from both companies, and AT&T’s win in federal court on AT&T/Time Warner. T-Mobile and Sprint have hired a small army of lawyers and former government officials to promote the deal.
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The politics are complicated, said former FCC officials now in industry. Makan Delrahim, head of the DOJ Antitrust Division, may now be looking to notch a win after losing in the AT&T case, they said. T-Mobile/Sprint is a horizontal merger unlike AT&T/TW, with bigger competition implications, the ex-officials said. Ajit Pai may not want to be the FCC chairman who presides over wireless consolidation from four national carriers to three. The companies and the government didn't comment.
Tech Knowledge Director Fred Campbell expects a tough road. “FCC precedent indicates that it will have significant concerns regarding the unprecedented amount of spectrum the T-Mobile/Sprint entity would hold after the merger, an area that directly impacts the agency’s expertise,” Campbell said. “Even if the companies can convince the FCC to approve their deal, approval would likely be conditioned on the merged entity’s divestiture of substantial spectrum assets.”
“The problem with the deal is with the merits,” said Public Knowledge President Gene Kimmelman Tuesday. “It substantially concentrates an already highly concentrated market. Established antitrust precedent and practice is to reject such mergers because they are likely to raise prices and/or reduce quality and innovation. That's the law, so the deal has enormous problems."
It's “very hard to get a read on the odds,” Craig Moffett of MoffettNathanson told us. “There are good arguments for and against. And in the absence of anything more definitive, a 50-50 coin flip still feels about right.”
“Delrahim was dealt an embarrassing loss, but it’s unclear if he even cares,” said BTIG’s Walter Piecyk. “Pai delivered on removing the risk of Title II rate regulation despite threats on his family, so why would anyone question his resolve to evaluate a transaction based on the merits that he believes in?” In recent days, someone who allegedly threatened Pai over moving broadband service back to Title I under the Communications Act was arrested (see 1806290071).
Jennifer Fritzsche of Wells Fargo wrote investors after the hearing that odds of approval are “incrementally positive” though two potential concerns are spectrum and increased concentration of the prepaid market. “The FCC in particular will be open-minded and view the competitive environment through a wider lens,” she forecast. AT&T/TW "approval also showed an acknowledgement that the competitive environment and landscape has rapidly changed over the past few years,” she said.
Consumer groups oppose the deal, with Consumers Union and Public Knowledge testifying against it at last week's Senate Judiciary Antitrust Subcommittee hearing (see 1806270068). A big sticking point, observers agree, is that many believe having four national wireless carriers is better for consumers than three.
“The companies have made a very factually supported presentation that all of the incentives for the combined company are going to continue to be very pro-consumer,” said former NTIA Administrator John Kneuer, working for the deal. The two companies said the combined company will compete on price, services and differentiated offerings, he said. “The opposition is all kinds of a theoretical ‘big is bad’ without the same kind of support that the companies have put forward. I get that lots of people have this generalized suspicion anytime anybody gets bigger.” Kneuer expects approval. “Both Justice and the FCC are going to perform very fact-based analyses,” he said. “If they do that, I think the evidence makes a pretty compelling case that this is good for consumers.”
“Sprint/T Mobile would likely continue to be innovative and aggressive. But their problems are not on the merits, but on the margins,” said Adonis Hoffman, chairman of the for-profit Business in the Public Interest: “The public interest groups believe this will have a negative effect on consumer prices. And then there is this mythical notion that four carriers are better than three, which was perpetuated in 2014, at a time when the [Chairman Tom] Wheeler FCC just did not have the bandwidth or interest to review another big merger because it was dealing with net neutrality, media ownership" and other issues. There were questions at last week's hearing about the rural and low-income markets, which the two companies “have to address adequately,” he said. “But in a mature and competitive market with a well-developed ecosystem like today, it is difficult to come up with a pretext for denying the deal."
DOJ horizontal merger guidelines “presume this deal is anti-competitive,” said Jonathan Schwantes, CU senior policy counsel. The combination is good only for the two companies, he said. “When analysts claim that the notion of four carriers being better than three is a 'myth,' you only need to look to our northern neighbor Canada. The wireless market in Canada is dominated by three carriers, and it's home to some of the highest wireless rates in the world.” Both carriers already promised independently to deliver 5G, he said. “Now we are being told that only if allowed to merge will they be able to deliver a 5G network to consumers.”