Sprint and T-Mobile finally reached an agreement to merge their operations after years of discussing such a transaction, and the company’s management hopes to consummate the deal by the middle of next year.
However, standing in their way are federal regulators from the FCC and Department of Justice—agencies that previously pushed against such a merger (in the case of Sprint and T-Mobile in 2014) and have sued to block other telecom transactions (in the case of AT&T’s proposed purchase of Time Warner).
Management from Sprint and T-Mobile are making two key arguments to curry favor with regulators and others: it will be good for America and it will be good for jobs.
Specifically, they’re contending that a merged company and its 5G network would help ensure that “America and American companies lead in the 5G era”—noteworthy commentary considering President Trump made a similar argument when he moved to block Broadcom’s proposed purchase of Qualcomm. And the companies said that the combined company, New T-Mobile, will “employ more people than both companies separately and create thousands of new American jobs.” Again, that’s noteworthy considering jobs stood as a primary element of Trump’s presidential campaign.
So, what are the chances that regulators will buy those arguments? Most analysts aren’t giving very good odds to Sprint and T-Mobile.
“We believe there is less than a 40% chance the deal will be approved by regulators, as it is currently positioned,” BTIG’s Walter Piecyk wrote this morning. “There is clearly much higher uncertainty with the current administration which could end up being a benefit to deal approval. However, uncertainty is not typically favorable for how investors discount the probability of a transaction closing.”
The analysts at MoffettNathanson noted that the FCC and DOJ both argued that the country needs four nationwide wireless operators to ensure competition when they moved against AT&T’s proposed purchase of T-Mobile in 2011. “Seven years ago may seem like a lifetime on Wall Street,” the analysts noted. “But it is a blink of an eye in Washington.”
Further, the MoffettNathanson analysts wrote that the Herfindahl–Hirschman Index (HHI), which measures competition in a given industry, currently sits at 2,500 in the wireless industry, before the merger. The firm said that the DOJ could challenge a merger if the score was as low as 1,500—and that the merger of Sprint and T-Mobile would raise it all the way to 2,700. However, the firm noted the DOJ could consider MVNOs, cable companies and the growing IoT as elements to consider outside of the HHI.
Nonetheless, the MoffettNathanson analysts only give the deal a 50/50 chance of being approved.
Similarly, the analysts from Wells Fargo don’t believe Sprint and T-Mobile will have an easy go of it.
“The message from our regulatory contacts was simple—‘this won’t be easy,’” the Wells Fargo analysts wrote in a report. “While we believe the messaging itself is quite compelling—job creation, infrastructure investment to keep up with China, the wireless industry moving beyond 4 players, etc. But the numbers become harder when looked at purely from a market concentration standpoint.”
But the analysts at Jefferies offered a ray of hope: “Based on our conversations, the FCC at least seems open to evaluating the deal on its merits, though the DOJ could be an obstacle,” they wrote in a report. “The outcome of the pending T-TWX (TWX, Hold) ruling (expected by early June) could influence the DOJs appetite to oppose a deal, though deal dynamics are very different.”
Finally, the analysts at Oppenheimer wrote that the chance that Sprint and T-Mobile will obtain approval for their transaction are actually quite high: “We see an 80% approval probability, but with conditions,” they wrote. “Wireline/ wireless/video markets are converging, which we expect the DOJ to consider, but with structural remedies (wholesale company?) that essentially enables a fourth competitor.”
Finally, analysts pointed to one other element: “TMUS/S’s foreign ownership could complicate the process,” wrote the analysts Macquarie, pointing out that Germany’s Deutsche Telekom is T-Mobile’s parent company and Japan’s SoftBank is Sprint’s parent company.