T-Mobile/Sprint Merger Increasingly Uncertain
States’ lawsuit, asset divestitures, and potential new competition have analysts thinking deal may fall through
As the much-anticipated merger of T-Mobile and Sprint – the third- and fourth-largest wireless carriers in the United States, respectively – inches closer to fruition, some analysts are speculating that challenges and concession demands could still derail the $26 billion deal.
The Lowdown: The Department of Justice continues to review the proposed merger that would result in the combined company becoming the second-largest carrier – leapfrogging AT&T and rivaling Verizon. Federal Communications Commission (FCC) chairman Ajit Pai endorsed the merger last month, but regulators still want to see significant structural changes to protect consumer interests.
At the same time, 13 states and the District of Columbia are suing T-Mobile and Sprint to prevent the deal from going through. The state attorneys general say a larger T-Mobile and the elimination of a fourth major wireless carrier will leave consumers with fewer choices and could result in service cost increases.
The Details: The states’ lawsuit doesn’t worry analysts and market watchers as much as regulators’ demands that Sprint spin off MVNO Boost Mobile and divest spectrum capacity. The prevailing theory is that the loss of this business unit and valuable spectrum capacity will open the door to create a powerful new fourth-place carrier that will undercut the new T-Mobile’s prices. If that’s the case, analysts say, T-Mobile’s parent company, Deutsche Telekom, will have less incentive to follow through with the merger.
The states suing to block the merger are using the same argument, accusing T-Mobile of backing away from concessions to spin off business assets to create more competition in the market. States are concerned that the merger of T-Mobile and Sprint, and the resulting consolidation of four carriers to three, will remove consumer choice and cause service prices to rise. The states’ case will go to trial in October unless the parties reach a settlement.
Sprint agreed to sell Boost Mobile to clear the way for the deal. Dish Networks is looking at buying Boost for $6 billion, as it already has an agreement in place with the FCC to extend wireless coverage to 70% of the markets it covers.
The Impact: The outcome of the T-Mobile and Sprint merger is significant to the market and channel. For the past year, T-Mobile has ramped up its capacity to engage with channel partners to expand its B2B sales and service capacity. Adding Sprint’s infrastructure and service coverage will give T-Mobile and its partners greater market power.
A failed merger, on the other hand, will not likely derail T-Mobile, which is growing market share at the expense of rivals AT&T and Verizon. Sprint, however, will likely need significant changes in its management and organizational structure to remain viable and relevant in the market.
Background: T-Mobile and Sprint announced the merger intention on April 28, 2018, and set an initial deadline to seal the deal by the same date in 2019. The companies extended the deadline to July 29. Chances are that the companies will extend the deadline again until after the state lawsuits go to trial in October, unless the disputed issues are resolved.
The Buzz: “By putting Dish into business with no existing subscriber base and no existing ARPU [average revenue per user] to protect, the only available strategy for Dish is to aggressively underprice,” said Craig Moffett, telecom analyst at MoffettNathanson. “It’s almost unimaginable Deutsche Telekom would have any appetite where a solution would so radically destabilize the industry. It would be a Pyrrhic victory.”
