When T-Mobile agreed to purchase rival Sprint for $26.5 billion, executives brushed aside concerns that Trump administration regulators might view the deal no more favorably than their Obama-era predecessors.
The mobile phone market has changed so dramatically in four years that anti-competition standards are less threatening, according to T-Mobile Chief Executive Officer John Legere and his Sprint counterpart Marcelo Claure, and the combined firm’s prowess in upgrading the nation’s wireless networks would actually allow it to lower prices and add workers, rather than lay them off.
Investors, quite literally, didn’t buy it.
In the two trading days after the deal was announced, Sprint’s stock price sank 17 percent to $5.42, well below T-Mobile’s offer of $6.62 a share, indicating the market’s lack of confidence that the deal would be completed.
There’s good reason for the pessimism, according to antitrust lawyers, consumer advocates and stock analysts. While non-traditional providers have entered the mobile communications market, their customer base is a fraction of those held by dominant players such as AT&T and Verizon. Additionally, two of the companies — Altice and Comcast’s Xfinity — are “virtual operators” that sell services powered by Sprint and Verizon, respectively.
To counter that, Sprint and T-Mobile are heavily emphasizing a combined company’s ability to more rapidly develop and deploy a 5G wireless network, with higher-powered transmission capabilities. That may impress President Trump, who cited America’s competitive edge in the technology shift as one of the main reasons for blocking Singapore-based Broadcom’s attempt to take over Qualcomm earlier this year.
It might also sway the Federal Communications Commission, which considers consumer benefits in evaluating mergers and has determined that the country’s wireless market is now competitive for the first time since 2009.
It’s unlikely, however, to influence the Justice Department — which focuses on anti-competitive issues, largely assessed through the prism of price. The agency’s antitrust chief appointed by Trump, Makan Delrahim, has already contested one major transaction — AT&T’s purchase of Time Warner Cable — in federal court, signaling a tougher stance toward potentially problematic mergers than some past Republican administrations.
And unlike antitrust enforcers under former President Barack Obama, Delrahim has said he prefers “structural remedies” like mandated asset sales to behavioral conditions that are difficult to enforce and often fall short of their goals.
Such a condition might make the Sprint merger less attractive, though the two companies deflected analysts’ initial questions about whether concessions might be required.
The market is more competitive now than in mid-2014, when a previous plan to combine Overland Park, Kan.-based Sprint and Bellevue, Wash.-based T-Mobile collapsed amid reports of opposition from Obama regulators, Claure and Legere said.
“New entrants have rushed into this market,” added T-Mobile Chief Operating Officer Mike Sievert. “This is, long since passed, no longer a four-player market.”
Comcast netted more new subscribers last year, he pointed out, than AT&T and Verizon combined. Even so, its 577,000 subscribers as of late April are dwarfed by AT&T’s base of 156.7 million and Verizon’s of 116.3 million. T-Mobile comes in third, with 72.6 million subscribers, while Sprint has 59.7 million.
Those numbers show the crux of the problem, skeptics say.
“The market has not changed in any significant way,” said Gigi Sohn, a fellow at Georgetown Law’s Institute for Technology Law & Policy, who advocates for open and affordable communications services. “There are still four nationwide mobile wireless network operators, and this merger will take it to three.”
While companies like Comcast lease capacity from the Big 4 providers and resell it, “they operate at the whim of those operators, and have a fraction of the number of customers,” she said.
In fact, T-Mobile’s Legere has, himself, dismissed the competitive threat from cable operators with virtual mobile networks.
“The furthest thing from my mind is any concern about the impact of cable,” Legere told investors on a February earnings call. “They’re incompetent, and they don’t belong in wireless without having owner economics.”
Traditionally, the Justice Department hasn’t viewed resellers as the equals of original providers either, noted Blair Levin of New Street Search. While cable resellers like Comcast and Altice can enhance mobile services with Wi-Fi signals, he said, “no Wi-Fi based offerings have proven viable without a cellular back up offering where Wi-Fi isn’t available.”
Further, the Trump administration’s willingness to contest the AT&T takeover of Time Warner Cable increases the odds that it will reject T-Mobile’s proposal, Levin said.
Even though the deals aren’t comparable on the surface, with AT&T trying to buy a company at a different point in the supply chain while Sprint and T-Mobile are direct competitors, the court ruling — which will have been handed down by the time Justice staffers review the more transaction — may influence what happens.
“Some have suggested a loss in the AT&T case would make the government more gun-shy,” Levin said. “The more likely outcome is that a loss will cause the division to be more anxious for an easy win. In a case to block a No. 3 buying a No. 4 in a four-player market, the odds would favor the government.”
A deal between such dominant players would typically attract close scrutiny, said University of Albany professor David Turetsky, who worked in the Justice Department’s antitrust division in the Clinton administration and served in the Federal Communications Commission from 2012 to 2013.
“The touchstone for antitrust review is whether the merger may substantially lessen competition in any market,” he said. “Prices are a big part of it, but only one part. They will also look at the market structure and try to understand whether an even more concentrated market facilitates collusion.”
T-Mobile and Sprint are likely to “argue that there are more participants in the marketplace that need to be considered beyond the four, but most of the companies I’ve heard them mention so far have small market shares, and plans that may not lead to them becoming full-fledged competitive forces,” Turetsky said.
Ultimately, as in 2014, the odds of regulatory approval aren’t good, said New Street Research’s Levin. The costs of trying aren’t high, however, and the potential benefits are great, “so we think it is worth the companies’ time and effort,” he added.
Legere, who met with the Federal Communications Commission last week, remains confident that he can convince authorities of the deal’s merits.
Initial conversations with the agency went well, he said, and “we’re confident that once the regulators learn about the compelling benefits of this transaction, they will agree that this is the right move at the right time for America.”
Legere said he looks forward to spending more time in Washington, “meeting and discussing with everyone who will hear me.”
Some members of Congress have already expressed an interest: Congressional Democrats asked the House Energy & Commerce committee last week to hold a hearing on the deal.
“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,” panel Democrats Frank Pallone Jr. and Mike Doyle wrote in a letter to Chairman Greg Walden, an Oregon Republican. “The American people want to know what a transaction such as this will do to wireless prices.”
