Analysis: Airline merger opens door to still-unlikely Sprint/T-Mobile deal

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The Department of Justice's proposed settlement allowing American Airlines and US Airways to merge has sparked speculation that the Obama administration might allow a merger between Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS) before the next president takes office. However, there are formidable barriers to such a deal, including the administration's own wireless priorities.

The Justice Department's antitrust settlement on American Airlines and US Airways, which came after the DOJ had sued to block the merger in August, will consolidate the airline industry down to four major players. The settlement includes divestitures at major airports and a pledge to maintain service to smaller cities. The tactic marks a reversal from the hardline stance that the DOJ took when it sued to block AT&T's (NYSE:T) proposed 2011 acquisition of T-Mobile, which led to that deal unraveling.

Executives from Sprint and T-Mobile have expressed a desire in recent months to combine at some point in the future to serve as a more effective counterweight to AT&T and Verizon Wireless (NYSE:VZ), which, according to industry analyst Chetan Sharma, accounted for 71 percent of U.S. mobile data services revenues in the third quarter and 68 percent of the nation's subscription base.

T-Mobile CFO Braxton Carter said at an investor conference in late September he thinks further consolidation in the U.S. wireless market is inevitable. "It's the logical ultimate combination," he told Reuters recently of a merger between Sprint and T-Mobile. "It is not a question of if but a question of when there is further consolidation in our industry."

Sprint CFO Joe Euetneuer has declined to comment directly on the merger of Sprint and T-Mobile. He said recently though that other markets have showed that having three competitors of roughly the same scale produces more competition. "From a macro perspective one would say that [further consolidation] would be a good thing for the industry," he said.

Japanese operator SoftBank has acquired 80 percent of Sprint via a deal that was finalized in July, around the same time Sprint acquired partner Clearwire. T-Mobile completed its own merger with prepaid player MetroPCS in May and has been operating as a publicly traded company since then. AT&T is pursuing a deal to acquire smaller prepaid player Leap Wireless (NASDAQ:LEAP), a deal AT&T expects to close early next year.

However, any Sprint/T-Mobile deal would face numerous complications. First, Sprint is in the middle of a complex network buildout and just committed to a nationwide deployment of its 2.5 GHz spectrum to augment its LTE service. That will take time, money and focus from the company's management team. Additionally, T-Mobile has spent 2013 carving out a new brand niche as the "uncarrier," and is completing its own LTE deployment.

Further, the two companies operate on different spectrum bands and technologies. T-Mobile uses 1700 MHz AWS spectrum for its LTE network and 1900 MHz PCS spectrum for HSPA+ services, while Sprint supports LTE on 800 MHz, 1900 MHZ and 2.5 GHz and CDMA services on 800 MHz and 1900 MHz. Sprint is still getting out from under its disastrous merger with Nextel, and likely does not relish the idea of more complicated network technology integrations.

Moreover, according to BTIG analyst Walter Piecyk, a Sprint/T-Mobile merger would fly in the face of the Obama administration's stated preference of having four national carriers.

"The top priority in the administration is a successful incentive auction" of 600 MHz broadcast TV spectrum, Piecyk told FierceWireless, which he thinks is not likely until 2015. "It's hard to believe that the administration, through its arms of the FCC or DOJ, would permit the merger of these two companies ahead an incentive auction, especially given the FCC is considering applying bidding restrictions on AT&T and Verizon."

At the heart of the incentive auctions is billions of dollars in expected funding for a nationwide public safety broadband network. Getting that funding requires broadcaster involvement, Piecyk noted, and getting enough broadcasters involved will likely rely on the belief that there will be numerous bidders for the 600 MHz spectrum. "These are big stakes at play," he said.  

For more:
- see this WSJ article (sub. req.)

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