Over the weekend, T-Mobile and Sprint came to an agreement with each other. After years of negotiations, the two companies decided to merge operations to become a powerful third carrier instead of doing things separately.
But even though the two companies have reached an agreement, there is still the issue of being allowed by federal regulators from the Department of Justice and the FCC to merge. Ever since merger talks began, these two government agencies have been pushing against the possibility. Not to mention, they have even successfully sued to block the transactions of other telecom companies (AT&T-Time Warner).
With Sprint and T-Mobile hoping to complete the deal by the middle of 2019, they still have to wait on the approval of these two agencies. As of this writing, it’s still too early to determine whether the regulators will vote to approve the deal. And to make matters worse– the two agencies have not made any comment since the agreement was done.
Executives from Sprint and T-Mobile, however, remain hopeful of getting a favorable decision from the regulators. They believe that they will get an approval since the merger will be good for jobs and will be good for America. This is because they believe the merger will help make sure that “America and American companies lead in the 5G era.” The same argument was made by US President Donald Trump when he decided to block the Broadcom’s proposed Qualcomm purchase. The executives believe that the New T-Mobile will create thousands of new jobs for Americans and will hire more people together.
Although these points seem valid and likely to sway the decision of the two government agencies, most analysts are not too keen about this.
“We believe there is less than a 40% chance the deal will be approved by regulators, as it is currently positioned. 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.” – Walter Piecyk, BTIG
“The message from our regulatory contacts was simple– ‘this won’t be easy.’ 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.” – Wells Fargo
“Seven years ago may seem like a lifetime on Wall Street. But it is a blink of an eye in Washington.” – MoffettNathanson
But not all analysts believe T-Mobile and Sprint are fighting a losing battle.
“Based on our conversations, the FCC at least seems open to evaluating the deal on its merits, though the DOJ could be an obstacle. The outcome of the pending T-TWX (TWX, Hold) ruling could influence the DOJs appetite to oppose a deal, though deal dynamics are very different.” – Jefferies
“We see an 80% approval probability, but with conditions. Wireline/wireless/video markets are converging, which we expect the DOJ to consider, but with structural remedies that essentially enables a fourth competitor” – Oppenheimer
But why do T-Mobile and Sprint have to merge?
Separately, the two companies place number 3 and number 4 (respectively) in the wireless market. Even though T-Mobile has earned subscribers through its “Uncarrier” marketing campaign, it mostly stole Sprint’s market share instead of its two bigger rivals. Sprint, on the other hand, is deeply buried in debt and is no longer able to earn a consistent profit.
And with AT&T and Verizon all set to roll out 5G networks in the next couple of years, T-Mobile and Sprint would only be in deeper trouble; especially since they were among the last to implement 4G. In order to continue to grow and to survive, these two companies need to merge.
This, unfortunately, may not be reason enough to win the vote of the antitrust regulators. When industries go down from four to three players, the customers can expect the prices to almost always go up. T-Mobile CEO John Legere and Sprint CEO Marcelo Claure assured the public, however, that the deal won’t be harmful to consumers since T-Mobile has been known to offer low-cost plans.
In addition to this, the two companies are expecting to save up to $ 6 billion a year by merging together. This is all thanks to the efficiencies they will gain by combining infrastructure. One plan they have is to cut down on maintenance costs by shutting down 35,000 redundant cell sites. For the consumer, this means that prices will be lowered.
Once the deal is finalized, the companies say they will be hiring 80,000 full-time employees in the country. T-Mobile also promises they will launch a nationwide 5G buildout, which will be incredibly expensive for the company to handle alone.
But before Sprint and T-Mobile start planning out things, they have to present a compelling case. They need to convince the regulators that this is the right move not only for the two companies, but for consumers and for the country.
Source: Fierce Wireless, CNN