Framing the “trial of the century” like a football game, analysts at New Street Research are gearing up for the second half, with the T-Mobile and Sprint this week getting a chance to argue their points for their proposed merger after most of last week involved opposing states presenting their case.
Just over a dozen states, led by New York and California, are leading the fight against the merger of T-Mobile and Sprint. Last week, lawyers representing the state attorneys general (AGs) presented witnesses to show why the combination would not be good for consumers.
By the end of the week, it appeared the states had a solid lead, but “now the companies get to play offense, and the states’ lead is not insurmountable,” wrote New Street’s Blair Levin in a weekend note to investors.
T-Mobile CEO John Legere was on the stand at the end of the week, followed by President and COO Mike Sievert and T-Mobile President of Technology Neville Ray. Today, former Sprint CEO and current Chairman Marcelo Claure was on deck. Other Sprint executives and Dish Network co-founder and current Chairman Charlie Ergen also are expected to testify this week.
During the course of Legere’s testimony, it was revealed that T-Mobile was at one point in 2015 considering a deal with Dish, but those talks fell through. Legere recalled that Ergen believed T-Mobile would “disintegrate” and have its stock fall below $20 as opposed to the $25 price the stock was trading at when the deal was discussed, CNET reported.
Meanwhile, analysts at LightShed Partners—Walter Piecyk and Joe Galone—said they think things are going better than expected for T-Mobile. This week’s witnesses, including Ergen and Claure, could alter the momentum but they suspect investors might have been too pessimistic about T-Mobile’s ability to prevail in court.
Based on details that have emerged during the trial, they believe Dish’s MVNO deal with the New T-Mobile is more attractive than they initially thought.
“Many investors believe that Ergen can be the swing factor in the trial,” the LightShed analysts wrote. “We do not believe Dish has an ulterior motive to tank this deal based on prior discussions with Ergen and his team. That view has been further strengthened as we have gained a better understanding about the favorable structure and pricing of Dish’s negotiated MVNO and after learning more about the struggles that Comcast has faced with its MVNO agreement with Verizon.”
While they believe that a blocked deal could offer a positive outcome for Dish, “We believe Ergen will make a good faith effort at the trial this week to aid T-Mobile (and himself) at closing this deal,” they added. “We also believe Ergen will be more effective on the witness stand than most investors expect, based on our observations of him testifying in bankruptcy court proceedings and watching the State AG lawyers in this case.”
Ergen’s testimony is seen as pivotal because the “fix” in the case is setting up Dish as a viable fourth competitor. For years, Dish has been known in the industry as a spectrum hoarder. The big question is how Ergen will come off on the witness stand. He’s been called an unpredictable personality—one that Levin says could be “television worthy,” in contrast to the usual telecom industry execs. Ergen has to convince the judge that he and his team will build out a network and compete aggressively in the market.
Last week, Deutsche Telekom CEO Tim Höttges and head of M&A Thorstein Langheim were called as witnesses, and the states were able to introduce some evidentiary evidence that hurt the companies’ case, according to Levin. Specifically, Höttges wrote an email to Langheim following a meeting with Amazon executives, where he said Amazon “clearly denied being interested” in a Dish partnership earlier in the year, and that Höttges believed it was “another one of Charlie Ergen’s stupid bluffs."
“This is problematic not as evidence about the fix per se; Amazon’s disinterest is irrelevant," Levin told investors. "But for DT itself to characterize Ergen as a person who engages in a series of ‘stupid bluffs’ is powerful language that may carry over to cause the judge to more seriously doubt whether Ergen’s fix will be ‘timely, likely, and sufficient.’”
It’s worth noting that during an investor event last week, Sievert said T-Mobile struck a deal with Dish this year because the Department of Justice (DoJ) insisted on it, and it’s unprecedented. But they agreed to a set of enablements that neither Dish nor any other player would ever have gotten except for this merger. “They (Dish) probably just didn’t have a business model as to how to unlock all that spectrum," Sievert said by way of explaining the “why now” question.
The analysts at New Street said they believe the states did a good job presenting their side last week. The states’ economist, Carl Shapiro, held up very well under cross-examination. But they also pointed out that the most important scoreboard, so to speak, in the trial is what’s in Judge Victor Marrero’s mind. The judge has been asking probing questions in such a way that it’s impossible to ascertain which way he might be swayed.
The companies are claiming some substantial benefits from the deal, and it makes sense that the judge would probe them on that, according to Barbara Sicalides, a partner at Pepper Hamilton LLP and head of the Antitrust Section of the firm’s Trial and Dispute Resolution Practice Group.
Going from four to three in any industry is a big deal, and it has to be proven that there will be as much competition after the deal; there can’t be a substantial lessening of competition. And in any industry, if the two that are merging are usually the disruptors in the marketplace that offer lower prices, that’s a big deal, she said. “A four-to-three deal is a big deal in any industry.”
The only time it might not matter so much is if it were an industry where a new competitor could get up and running in a matter of months, she said. Of course, that’s not how it’s been in wireless, where companies require years of investment and a lot of it. Granted, Dish has indicated it will deploy a virtualized network from the get-go and forego legacy equipment, so it can presumably get to scale faster than traditional operators have done, but that’s also not yet proven.
This particular proposed merger has been unprecedented in a number of ways, including having states arguing a case that two federal entities have approved. Typically, they don’t do it on their own, and it’s very unusual for states to be in this position, according to Sicalides.
Sicalides said she would not expect the judge to issue a decision before the first of the year; usually it’s weeks after a trial ends when a judge would publish a decision and it could go into February. It’s a lot of work to put together a decision like this and there’s a significant chance it will be appealed, so the judge will want to take his time and get it right. “There will be a lot of pressure on the judge to get it done,” she added, noting the length of time the transaction has been in the works.
If the judge rules the transaction is bad for consumers, it could be a big problem for the U.S. Department of Justice and FCC, since both of those organizations approved the deal with conditions, she said. “It’s a lot of responsibility.”