With a final decision reportedly expected next week on T-Mobile and Sprint’s proposed $26.5 billion merger, MoffettNathanson analysts indicated a "no deal" situation may be better than the viable fourth-competitor scenario likely needed to win regulatory approval.
“It is becoming increasingly likely a successful merger consummation may come only at the expense of a worse industry structure,” wrote Senior Analyst Craig Moffett in a Friday research note. “Said differently, the status quo may be the best we can hope for.”
Merger negotiations with the U.S Department of Justice are ongoing, and reports continue to surface that they center on setting up Dish Network as a fourth national carrier by divesting Sprint and T-Mobile assets and setting up some sort of network sharing arrangement.
CNBC reported Thursday that Deutsche Telekom (DT) must make a decision about a network sharing agreement by next week, but is concerned a cable company like Comcast or Charter would try to enter the industry by acquiring Dish, and be able to use T-Mobile’s network via an MVNO agreement. DT reportedly also doesn’t want players like Amazon or Google to enter the fray.
To satisfy regulators as a viable competitor MoffettNathanson analysts believe the Dish scenario would require a spectrum hosting deal rather than a simple MVNO agreement, resulting in Dish becoming a credible threat to the industry and a negative for T-Mobile.
“If Dish enters the market with a large amount of capacity and no meaningful subscriber base of ARPU to defend, they would have every incentive in the world to be a disruptive discounter,” analyst Craig Moffett wrote. “One need not believe in a follow-on Dish deal with Amazon, Google, or a cable operator to see this as bad for the market, and indeed, worse than the ‘no deal’ scenario for T-Mobile.”
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Dish already sits on a large amount of spectrum and is racing against a Federal Communcations Commission March 2020 buildout deadline to put it to use, or risk losing licenses the company spent billions on. Moffett noted a spectrum hosting deal is also the only answer to Dish’s buildout deadline issue.
“It is hard for us to imagine, then, that that [spectrum hosting deal] is not the issue that is really being discussed in the four-way negotiations between Sprint, T-Mobile, Dish Network, and the DoJ, irrespective of the reporting to the contrary,” Moffett wrote.
Moffett also said it’s hard to imagine the DoJ staff or state attorneys generals that are suing to block the merger would be satisfied with a second scenario, where approval happens without a spectrum hosting deal. In that setup, the firm said the deal might even include prohibitions to keep players like Amazon or cable operators out of the industry and Dish would not be a serious national competitor, in which case T-Mobile would be better off with the merger.
A third possible outcome, according to Moffett, is DT rejects a spectrum hosting deal and the merger never happens.
“While we wouldn’t suggest that Scenario Three is the most likely scenario, we have argued for months that it is a much more likely outcome than most people seem to think,” the analyst wrote.
While market sentiment has favored the Sprint/T-Mobile tie-up in the last six months, the recent Dish developments are causing that to shift, according to the firm.
“The bottom line here is that the ‘market repair’ catalyst now seems to be off the table in all scenarios,” Moffett wrote. “It’s very likely either the status quo or something worse.”