After attending most of the T-Mobile/Sprint trial last month, analysts at Cowen believe the state attorneys general (AGs) will prevail in their suit to block the transaction.
Thirteen states and the District of Columbia, led by New York and California, argue that the deal is anticompetitive, and that they don’t think the fix—setting up Dish Network as a fourth facilities-based carrier—will suffice. Judge Victor Marrero is presiding over the case in a Manhattan court room; closing arguments are due later this month.
In a policy note for investors Thursday, Cowen analyst Paul Gallant said the states likely met their mandate to show the merger is presumptively anticompetitive; he’s giving the states a 60% chance of prevailing.
“The states very likely did this by showing that the wireless market today is already ‘highly concentrated’ by market share and the merger would make it more so,” Gallant said. “T-Mobile tried to get Judge Marrero to include MVNOs as additional competitors beyond the Big 4 (which would reduce the HHI below ‘highly concentrated’). But both the parties’ private texts and Marrero’s own questions repeatedly referred to this as a ‘four to three merger’ – and Judge Marrero allowed in the FCC’s conclusion that MVNOs don’t count as real competitors. So we believe the states met their initial burden of proof.”
They aren’t the only ones. In a Dec. 23 note to investors, analysts at New Street Research stuck by their theory that the states are ahead, but it’s a close one. “We continue to believe it is a close case, but the states have a better chance of succeeding than the companies,” wrote New Street’s Blair Levin. “We will be re-evaluating as we read the proposed findings of fact and law, and then again as we listen to the closing arguments.”
Judge Marrero will make the final decision, which could be appealed. The court set post-trial arguments for January 15, with each side having two hours to make their closing arguments. New Street expects the court will rule sometime between mid-February and mid-March.
Optimism for the companies
After listening to eight days of the trial’s testimony last month, analysts Walter Piecyk and Joe Galone of LightShed Partners were optimistic about the outcome for the companies, saying they believed the state AGs failed to make a compelling enough case to justify a district court judge effectively overruling the decisions of two federal agencies.
Indeed, on Dec. 20, the U.S. Department of Justice (DoJ) and Federal Communications Commission (FCC) filed a statement about their roles in the case as the enforcers of federal antitrust laws and mergers transferring FCC-granted licenses.
Levin noted that just before trial began, the DoJ filed a motion to disqualify the states’ lead counsel. New Street characterized that filing as a Hail Mary in the ninth inning, justifying the mixed football/baseball metaphor on the grounds that the motion had the same odds as throwing a Hail Mary in a baseball game. They deemed the more recent filing another Hail Mary on the part of the DoJ, but “this time at least it’s in a football game. That is, at least it has some chance of affecting the outcome, but in our view, those chances are very low.”
Several analysts agreed that Dish’s Charlie Ergen was a good witness for the companies. But Cowen’s Gallant believes Judge Marrero won’t fully credit Dish’s entry as a defense for several reasons, including the length of time it will take Dish to ramp—four years to reach 70% coverage, solidly beyond the two to three years that Judge Marrero twice referenced in his pretrial conference as the correct legal timeframe.
In addition, Dish’s reliance on T-Mobile is an issue. “We counted three times that Judge Marrero asked witnesses about T-Mobile’s incentive to prevent Dish from succeeding in wireless,” Gallant wrote. During Ergen’s testimony, the states pointed out that Dish has not built a wireless broadband network despite telling the FCC it would as early as 2012; “that Dish has been criticized by the FCC and a federal court for failing to take promised actions; and that Dish is free to sell its spectrum in the coming years to an existing carrier rather than build its network.”
Finally, Gallant wrote: “T-Mobile testified that both it and Sprint are currently subscale to AT&T and Verizon, which later led Judge Marrero to question whether Dish – with 9 million initial Boost customers – could truly compete if Sprint can’t with 50M. While all of these arguments do not negate the Dish fix, we think they give Judge Marrero sufficient ammunition not to credit Dish as a sufficient remedy, and we interpreted some of Judge Marrero’s own questions as agreeing with at least some of these critiques.”
There’s also the political overlay. Judge Marrero is a Democrat, and “this merger battle is highly partisan,” Gallant added, noting the case was brought by Democratic AGs, and is supported by most congressional and FCC Democrats who took a public position.