T-Mobile-Sprint Deal in Doubt Over Attempt to Make 3 Equal 4
T-Mobile-Sprint Deal in Doubt Over Attempt to Make 3 Equal 4
(Bloomberg) -- T-Mobile US Inc.’s $26.5 billion takeover of Sprint Corp. has run into a challenging math problem that might be better solved by a magic wand than a calculator: how do you get four competitors down to three and still end up with four?
Top U.S. antitrust officials have held the view for almost a decade that the country needs four national competitors to keep prices down and innovation thriving. That’s the seemingly impossible hurdle T-Mobile and Sprint have to clear to gain Justice Department approval to merge.
But instead of becoming a deal breaker, that conundrum has turned into a wildcard, eliciting potential interest from such disparate businesses as cable giants Comcast Corp. and Charter Communications Inc., and the online retailer Amazon.com Inc.
T-Mobile and Sprint, the No. 3 and No. 4 mobile players in a market dominated by Verizon Communications Inc. and AT&T Inc., are considering divesting some airwaves. Their goal is to set up a new player to replace the competition from Sprint and meet the Justice Department’s demands. One option could be to sell the Sprint brand to a new player.
Comcast said Friday it has no interest in acquiring wireless spectrum that Sprint and T-Mobile might want to divest, while Charter has declined to comment. Still, the developments raise questions about how far T-Mobile and Sprint are willing to go to create a new fourth competitor.
“The new conditions being reported could enable and accelerate a new well-funded competitor into the U.S. wireless market,” BTIG LLC analysts Walter Piecyk and Joseph Galone said in a report Friday. “We believe that might be enough to secure DOJ approval, but is Sprint worth that price?”
Building a fourth carrier from the ground up is “just not feasible,” said IDC analyst Jason Leigh. But if they give a new operator a friendly network-sharing agreement over a number of years while they build their own network, “that seems a little more palatable.”
The idea of a dominant player from a different industry stepping in brings a whole new set of challenges, MoffettNathanson’s Craig Moffett said in a note, scoffing at a report that Amazon was interested in entering the wireless business by purchasing Boost, the prepaid business Sprint has offered to divest.
“Every once in a while, a news item comes along that is so batshit crazy,” Moffett wrote in a Friday research note. “If the best available option is Amazon, then the cure would be worse than the disease.”
What Cure?
Not everyone is on board with the Justice Department’s assertion that four carriers are necessary for a healthy market -- a position the agency took in 2011 when it blocked AT&T from buying T-Mobile and has invoked more recently when it rebuffed Sprint’s earlier efforts to merge with T-Mobile. The Federal Communications Commission has blessed the deal without that demand, and some analysts agree.
It isn’t “financially sustainable to have four carriers,” said Chetan Sharma, a wireless industry analyst. He points to India, which once had as many as seven nationwide carriers, each with more than 10% market share. The arrival of an aggressive new carrier triggered a pricing “bloodbath.” Today, after a series of mergers, India has three nationwide carriers.
“Three is the more practical number longer term,” Sharma said.
Poster Child
Sprint, controlled by Japan’s SoftBank Group Corp., looks like the poster child for such an argument. An aggressive price cutter, the company has lost money for years and is hobbled by $39 billion in debt. CEO Michel Combes has said Sprint doesn’t have the scale to keep pace with investments by AT&T and Verizon, and lacks the airwaves needed to offer comparable coverage.
However, studies of Canada’s wireless market, which has just three carriers, show that consumers there pay above-average prices.
Sprint and T-Mobile are continuing discussions with the Justice Department following the decision by FCC Chairman Ajit Pai last week to recommend his agency approve the merger. Pai said he accepts the companies’ offer to sell Boost and build an advanced 5G network over three years, as well as their pledge to not raise prices while the network is being constructed. His priorities include advancing the U.S. position in high-speed networks and closing the digital divide in rural America.
Different Agendas
If the companies don’t reach an agreement with the Justice Department, the antitrust division could file a lawsuit seeking to block the tie-up, possibly flanked by state attorneys general opposed to the deal.
While the FCC and the Justice Department typically work closely 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.
And it’s the latter that worries opponents of the deal, even with the promise that a fourth carrier will be created.
“What I fear is it’s going to be a promise to build a fourth carrier on paper, and who’s going to make sure it happens,” said Gigi Sohn, a former aide to a Democratic chairman of the FCC. “That’s what I worry about.”
To contact the reporters on this story: Scott Moritz in New York at smoritz6@bloomberg.net;Olga Kharif in Portland at okharif@bloomberg.net;David McLaughlin in Washington at dmclaughlin9@bloomberg.net
To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net, ;Nick Turner at nturner7@bloomberg.net, Rob Golum
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