Sprint and T-Mobile continue to work to obtain regulatory approval for their proposed merger. But, according to some analysts, don't expect the discussion to turn to conditions—including divestitures—until later this year.
“We would not be surprised to see opponents refrain from offering conditions in these initial rounds of filings,” wrote the analysts at Wall Street firm New Street Research. “Generally, the opposition wants to push to kill the deal and only offer conditions as a last resort. There are many good reasons for such a strategy, but the biggest one is that one has to paint a picture of the horrors to arise and offering conditions at this time undercuts the clarity of images of problems to come.”
The New Street analysts also noted that the antitrust chief at the Department of Justice, Makan Delrahim, has expressed opposition to behavioral conditions.
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Sprint and T-Mobile announced in late April their plans to merge, arguing that a combined Sprint and T-Mobile, dubbed New T-Mobile, will result in more American jobs as well as a major 5G network build-out that will spur AT&T and Verizon to speed up their own 5G network build-outs. So far, the New Street analysts noted that they believe that Sprint and T-Mobile have engaged in a successful campaign to obtained approval for their merger. “Some have suggested that the excellent rollout by the company has increased the odds of success,” the analysts wrote. “We agree with the characterization of the rollout but not on the impact of the odds. The first rule of merger review analysis: a great rollout cannot win the deal but a bad rollout can doom it.”
The analysts also noted that opposition to the merger could well involve a significant discussion about what assets Sprint and T-Mobile might be required to sell off in order to obtain regulatory approval for their transaction, or what conditions they might be required to meet. The firm said that there are five major conditions hanging over the T-Mobile and Sprint transaction:
1. Spectrum. The firm said that Sprint and T-Mobile may be required to divest significant spectrum holdings in order to get approval for their deal. Interestingly, the analysts at Wells Fargo also noted that such a divestiture could enable the creation of a smaller wireless provider.
“How much spectrum would S / TMUS be willing to divest?” asked the analysts at Wall Street firm Wells Fargo in a note to investors this week. The firm pointed to the FCC’s move to deny a request to extend the pleading cycle associated with the proposed T-Mobile/Sprint combination. Those requesting the delay included the Rural Wireless Association.
“It is interesting to see that it was the RURAL Wireless Association,” noted the analysts at Wells Fargo. “It got us thinking that maybe there is an opportunity here for these carriers to join together and get some of this spectrum. And if that happens – it actually could help (not hurt) the S / TMUS case….and maybe a new half carrier emerges in this? So instead of going from 4 carriers to 3 if TMUS / S gets done – we go from 4 to 3.5.”
2. MVNOs and wholesale. The New Street analysts also pointed to some opposition among MVNOs and wholesale dealers to the transaction. Such companies are worried that the combination of Sprint and T-Mobile will reduce the number of options in the market for MVNOs and dealers.
3. Jobs. Although Sprint and T-Mobile have promised to increase the number of employees if their merger is approved, the New Street analysts said that this remains a concern in the Trump administration. “If the White House believes there is a risk that the companies will either cut jobs or raise prices before the 2020 election, it is more likely to urge the DOJ to block the deal. “
4. Interoperability. The New Street analysts noted that Sprint and T-Mobile could be required to ensure that their phones are interoperable with those of other carriers. This item follows a Department of Justice investigation into eSIM technology and whether the nation's wireless operators are conspiring to prevent customers from easily moving from one carrier to another.
5. Foreign ownership. Because Sprint’s parent is Japanese carrier SoftBank and T-Mobile's parent company is Germany's Deutsche Telekom, foreign ownership could become an issue in any transaction between Sprint and T-Mobile. “We think this is something of a question mark involving SoftBank, which has significant relationships with companies in China,” wrote the New Street analysts. “Given the security concerns about some Chinese telecom equipment providers, as well as the continuing trade dispute with China,10 we think this issue, which is not usually in the scope of the DOJ or FCC review, creates a small but material risk factor for the deal.”
Regulators may impose some conditions to address this ownership structure.