A conclusion to the winding saga that is the T-Mobile/Sprint merger is inching closer, with an antitrust trial against several state attorneys general suing to block the deal slated to start Monday.
Sources told CNBC Friday that T-Mobile (and parent Deutsche Telekom) is eyeing a price cut for what started as a $26.5 billion deal, since Sprint’s finical situation has worsened as uncertainty about a tie-up between the nation’s third and fourth largest wireless carriers lingered. Sprint has also been recently impacted by disclosures that it incorrectly claimed subsidies for inactive Lifeline subscribers. Renegotiating terms is something that’s been widely expected on Wall Street, CNBC’s David Farber acknowledged.
At the forefront though, is an antitrust case that New Street analysts dubbed “a trial of the century,” which is poised to be heard by Judge Victor Marrero in the U.S. Southern District of New York.
“While different analysts have different points of view of the market consequences, all agree that either result will have a market impact far into the future,” wrote the New Street team last weekend in an extensive research note reviewing pretrial memos filed the parties. And win or lose, the decision will also have “long-reaching significance for antitrust policy in our sector and others,” the team said.
While prospects of a settlement with opposing state AGs led by California and New York might be slimming by the hour, it’s still impossible to say for certain what could happen in a deal that’s seen its fair share of surprises since first announced in April 2018. That includes Dish potentially entering the wireless scene with ambitions to be a fourth national competitor and build a 5G network through a $5 billion deal for Sprint spectrum and prepaid assets. That agreement was made as part of concessions to secure DoJ approval for the merger.
At the start of the week, Roger Entner, founder and analyst of Recon Analytics, said he believed the case will go to trial but didn’t take a settlement completely off the table.
“You never know, they could find a settlement at any time,” Entner acknowledged.
Analysts at the Wall Street firm LightShed Partners in a Monday post also expressed the view that with a week to go, a settlement was unlikely.
“We believe the odds that T-Mobile is able to secure a settlement before the trial begins are low, although the company will likely be pushing hard even in the final hours before the trial starts,” wrote LightShed’s Walter Piecyk and Joe Galone.
T-Mobile recently swayed two states – Texas and Nevada – to reach a settlement and drop the suit. Still, individual state concessions have been minor, and some analysts appear united in the view that it has little impact on T-Mobile or the upcoming trial.
For the four states that withdrew from the State AG case (14 are still involved, while 15 states are supporting the merger), T-Mobile agreed to things like additional 5G build-out requirements and retention of jobs.
Of the concessions LightShed noted that “none are materially incremental to what T-Mobile has promised and in some cases they are oddly reduced” adding that T-Mobile hasn’t changed any deal synergy guidance in light of the concessions.
Entner too acknowledged that all the states that individually settled did so for minor benefits, adding they were “nothing that was really at the substance and at the core of the DoJ’s objection to the merger that led to the settlement.”
Analysts at New Street Research wrote, “We think that the [state] withdrawals slightly increase the very low odds of settlement before trial,” but added the firm believes “it will have no impact on the outcome of the trial.”
“As long as California and New York continue their efforts, the trial is highly likely to commence, and what will matter to the Judge are the facts and the law, not ‘momentum’,” wrote the New Street team.
T-Mobile has pledged a flurry of commitments that include maintaining prices, expanding wireless service in rural areas and building out nationwide 5G, but at the heart of the trial will be the impact on competition.
“It will get really interesting as they get going to the core of the issue, things like concentration in prepaid, especially the concentration in MVNO hosting,” Entner noted.
New Street said that while the deal odds are close, pretrial memos reinforce the firm’s stance that “the states are more likely than not to win, particularly due to weaknesses we see in the companies’ market definition, reliance on economic arguments with little support in antitrust precedent, a zig-zag approach to the DOJ and FCC’s judgments, a reliance on behavioral remedies to justify the fix and a reliance on public interest considerations, such as social or industrial policy, that generally are considered irrelevant to competition analysis.”
However, if T-Mobile and Sprint are successful, it could open the door to many more deals by creating precedent of what’s considered allowed, according to the New Street team.
“For example, the use of behavioral remedies at the DOJ, the agreements to assist in achieving certain social or industrial policy goals, defining resellers as full competitors, the assertion that increased capacity automatically leads to lower prices or any number of other arguments the Companies make, could draw a map for other deals to gain acceptance. “