After Monday’s news that the FCC appears headed toward greenlighting the proposed T-Mobile/Sprint combination with conditions, analysts at MoffettNathanson Research are now suggesting the odds of the deal may be 50/50 or even 60/40.
But they’re not, as seemed to be prevailing wisdom at the time, suggesting the chances are 80/20 or 90/10, and they noted that while it appears the deal has crossed one important obstacle, the FCC was neither the highest nor the most important hurdle. Therefore, how much one should increase their expected odds of approval is unclear.
The FCC has not yet voted on the matter, but FCC Chairman Ajit Pai announced he is OK with the deal given the commitments (PDF) that the companies are now making, which includes building out 5G over much of the country and the divestiture of Boost, one of Sprint’s prepaid brands. Fellow Republican commissioners Michael O’Rielly and Brendan Carr have indicated they will be voting with the chairman, which would give it a 3-2 win if it’s along party lines.
The next big step in the process is a decision from the Department of Justice (DoJ), and even though Bloomberg reported Monday that the DoJ is leaning against the deal due to antitrust concerns, it has not made a public decision.
“We were not surprised by Pai’s decision itself,” wrote MoffettNathanson’s analyst team headed by Craig Moffett in a note to investors on Tuesday. “We’ve also always assumed that the FCC could be convinced that the deal was in the public interest. Instead, we were surprised by the process. The FCC had effectively approved the deal without a vote. In fact, without even a meeting.”
That actually matters, the analysts went on to explain, and that has to do with the partisan nature of the review. That a merger review should split along partisan lines isn’t a surprise in today’s Washington, they said. But it raises the odds that the deal will be opposed by blue state attorneys general, all of whom are “itching to exercise the newfound power they learned they had two years ago when the California AG successfully blocked a Valero acquisition of two oil ports that the FTC had declined to oppose,” the MoffettNathanson analysts wrote.
Analysts are also puzzled by the decision by the FCC chairman to take the unprecedented step of declaring his position first, without public clarification on the likely direction of the DoJ. One likely scenario to explain that is Makan Delraim, head of the DoJ’s antitrust division, could announce he believes the deal should not be blocked, according to New Street Research policy analysts.
However, “in our view the biggest risk to the deal is a group of states suing to block the deal and obtaining a court decision that keeps the deal from proceeding,” wrote the New Street team led by Blair Levin. “While far from a certainty, we know that there is a critical mass of states, including California and New York, which have the necessary resources and have been preparing to go to court. While some of the conditions lessen the attractiveness of the litigation and the likelihood of success, we still think the odds slightly favor the states proceeding with litigation to block.”
Generally, courts will look to the DoJ and not the states as the experts in competition, and therefore, “the starting point for state efforts would be that they face an uphill battle. But we will have to reevaluate that if and when a judge is selected to rule on the matter,” the New Street analysts concluded.
Barbara Sicalides, a partner at Pepper Hamilton LLP who specializes in antitrust law, said she doesn’t remember another time where the FCC came out ahead of the DoJ with its announcement in this way.
“It’s extremely interesting that they would come out with an announcement first,” she said, adding that the filing on the part of T-Mobile and Sprint “reads like a very political submission.” The key things that they tout the merger will provide are “absolutely” issues the DoJ Antitrust Division and AGs have to look at.
“It’s pretty odd that the FCC is out there first saying this deal is going to do all these great things, essentially for competition,” she told Fierce Wireless. “These are all issues related to competition”—purported synergies, promises about prices and the claim that jointly they can successfully compete with AT&T and Verizon, but separately, they can’t as vigorously compete.
“All of these issues are squarely within the gambit of the DoJ Antitrust Division,” she said, adding that doesn’t mean the FCC can’t look at them, but it’s a curious set-up.
“The antitrust authorities very rarely give a blessing to a 4-to-3 transaction,” she said, adding that even if a competitor, like Sprint, is limping along, as long as it provides some pressure to rivals like Verizon, AT&T and T-Mobile to keep prices at a certain level or to innovate, the agency would not want to lose that pressure. If a company is so weak they don’t provide that and if their failure is imminent, the agency has to take that seriously and perhaps it’s the winning argument, but “that doesn’t typically happen.”