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U.S. Wants T-Mobile to Create New Rival Before Clearing Megadeal

From the start, the biggest concern surrounding the T-Mobile/Sprint merger was it would reduce the number of national carriers.

U.S. Wants T-Mobile to Create New Rival Before Clearing Megadeal
John Legere, chief executive officer of T-Mobile US Inc., speaks during a House Judiciary Subcommittee hearing in Washington, D.C., U.S. (Photographer: Andrew Harrer)

(Bloomberg) -- Top Justice Department officials want T-Mobile US Inc. and Sprint Corp. to lay the groundwork for a new wireless carrier -- with its own network -- as a condition to clearing their $26.5 billion merger, according to a person familiar with matter.

The two companies have been pondering additional concessions that could help win Justice Department approval for their deal, said people with knowledge of the discussions, who asked not to be identified because the talks are private. But the idea of spinning off a full-fledged national competitor would be a high bar for T-Mobile and Sprint to meet.

From the start, the biggest concern surrounding the T-Mobile/Sprint merger was it would reduce the number of national carriers from four to three, hindering competition. But the companies have argued that their deal would create a stronger No. 3 to market leaders Verizon Communications Inc. and AT&T Inc. So far, Justice Department antitrust chief Makan Delrahim hasn’t yet been persuaded by that position and still wants four carriers, according to one of the people.

Shares of Sprint fell 2.7% to $6.62 at 10:24 a.m. Thursday in New York. T-Mobile dropped less than 1% to $75.79.

The companies are under pressure to win Delrahim’s approval after securing support from the head of the Federal Communications Commission. A package of concessions endorsed by the FCC failed to persuade the Justice Department’s antitrust division to approve the transaction.

Washington Visit

Still, discussions have been productive and the Justice Department hasn’t reached a final decision, one of the people said. T-Mobile Chief Executive Officer John Legere and Sprint Executive Chairman Marcelo Claure, who met with top antitrust officials last week, were seen outside the Justice Department’s headquarters in Washington on Wednesday.

The companies and the Justice Department declined to comment.

T-Mobile and Sprint, the two smallest national wireless carriers, have to weigh whether the remedies offered to gain approval are too onerous. The challenge: make enough concessions to assure antitrust enforcers that competition will thrive as the industry shrinks from four rivals to three -- without eliminating the benefits of merging the two companies.

Setting up a fourth competitor is possible, but could be unpalatable to the companies, said Blair Levin, an analyst with New Street Research and a former FCC chief of staff.

“It can be done, but the question is whether there’s a solution that would satisfy the companies and the Justice Department and the states,” he said. “That’s hard.”

State Officials

If T-Mobile and Sprint fail to persuade the Justice Department to approve the deal, the government would sue in court to block the tie-up. State attorneys general, who can enforce antitrust laws, are also concerned the merger threatens competition and could join a U.S. challenge or sue on their own if the Justice Department approved it.

The talks with the Justice Department are taking place after FCC Chairman Ajit Pai last week said he’ll recommend that his agency approve the merger on the condition that the companies sell Sprint’s Boost prepaid brand, build an advanced 5G network over three years, and pledge not to raise prices while the network is being constructed.

Different Standards

While the FCC and the Justice Department typically work closely together in reviewing mergers, they base their decisions on different standards. The FCC weighs whether a deal is in the public interest while the Justice Department focuses on how a tie-up could harm competition.

The Sprint acquisition would consolidate the U.S. wireless market to three national players, sparking fears that consumers will see higher bills, an outcome the companies say won’t happen. The Justice Department has long been against allowing consolidation in the industry. In 2014, it opposed an attempt by Sprint and T-Mobile to merge. And it sued to block AT&T’s bid in 2011 to take over T-Mobile, saying the U.S. mobile market needs a strong fourth rival.

A new competitor could emerge from the cable industry, Levin said. If a provider has enough spectrum and a good virtual-network deal -- an arrangement that lets a company become a carrier without owning the infrastructure -- they could have time to build out their own network.

But it’s unlikely that the T-Mobile would go along with such a deal, he said.

“It would be counterproductive for T-Mobile to accelerate the entry of a competing network operator,” Levin said.

--With assistance from Andrew Harrer.

To contact the reporters on this story: David McLaughlin in Washington at dmclaughlin9@bloomberg.net;Scott Moritz in New York at smoritz6@bloomberg.net;Nabila Ahmed in New York at nahmed54@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Cécile Daurat

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