(Bloomberg) -- SoftBank Group Corp. Chairman Masayoshi Son has battled for years to merge T-Mobile US Inc. with his Sprint Corp. Now that he finally has a deal, he risks having his hands tied by a secretive U.S. government panel.
The merger between T-Mobile and Sprint would join the third- and fourth-largest U.S. wireless providers. The new company would be majority owned by foreign investors -- one German and one Japanese -- triggering a review by the Committee on Foreign Investment in the U.S. for any possible threats to national security.
That creates an added -- if familiar -- hurdle for SoftBank beyond scrutiny by U.S. regulators on antitrust and public interest grounds. If the security panel has concerns, it could impose conditions on the $26.5 billion deal, including limits on supply chains, governance and information sharing, as well as requiring tighter cybersecurity defenses, according to lawyers who work on security reviews of deals.
CFIUS reviews have become more onerous since President Donald Trump took office. The multi-agency panel, led by Treasury Secretary Steven Mnuchin, has adopted a tougher stance toward foreign investors, particularly from China. At least 10 Chinese acquisitions of American businesses have collapsed under Trump due to concerns raised by the panel, including Ant Financial’s deal for MoneyGram International Inc. and HNA Group Co.’s agreement to buy a stake in SkyBridge Capital.
China Trade Tensions
The security panel is toughening its stance amid growing trade tensions with China as the Trump administration pressures the country to lower trade barriers and address U.S. concerns over the theft of intellectual property. Trump has proposed imposing duties on as much as $150 billion in Chinese goods, while China has vowed to retaliate with tariffs on U.S. products, prompting fears of a trade war.
The crackdown on Chinese investment even extends to buyers from U.S. allies. Even though Tokyo-based SoftBank won’t be a controlling shareholder in the new company, its ties to Chinese entities will be a focus for CFIUS, according to David Turetsky, a former official at the Federal Communications Commission who now teaches cybersecurity at the University at Albany.
"They’re going to get a real look, and they should get a real look, as I hope would happen with any critical infrastructure deal involving foreign ownership," said Turetsky.
SoftBank is the biggest shareholder in the Chinese e-commerce company Alibaba Group Holding Ltd. Foxconn Technology Group, the manufacturer best known for assembling iPhones, is an investor in Son’s $100 billion Vision Fund, which is buying stakes in technology firms. Foxconn is based in Taiwan, but most of its factories are in China, where it is one of the biggest employers. China’s Huawei Technologies Co. and ZTE Corp., which have been branded national security threats by the U.S., are both suppliers to SoftBank, according to supply-chain data compiled by Bloomberg.
Representatives for SoftBank, Sprint and T-Mobile declined to comment. CFIUS reviews are confidential and the committee doesn’t comment on its work.
Sprint and T-Mobile said in a filing April 30 they have no Chinese equipment in their U.S. networks and promised to work with American officials to address any national security concerns. The T-Mobile deal also will be reviewed by a working group known as Team Telecom, which is comprised of representatives of the Justice, Defense and Homeland Security Departments. Those departments are also part of CFIUS. Team Telecom’s agreement on any deal is a necessary step for CFIUS approval.
The companies are pitching the merger as a means to give the U.S an edge in the development of the next generation of cellular technology, known as 5G.
"Both T-Mobile and Sprint are long-standing and trusted operators of U.S. networks and systems," the companies said in the filing. "We are American companies, headquartered and led by thousands of people here -- and we’re focused on making the U.S. competitive in the 5G race!"
That commitment to 5G could give the carriers a boost in the security review, according to analysts at CreditSights.
"One could argue that the Trump administration would be more concerned that the U.S. is behind China in developing 5G, and a T-Mobile and Sprint combination would bring the country ahead," they said.
SoftBank is no stranger to CFIUS. Last year, the telecommunications company founded by Son had to agree to restrictions to win CFIUS approval of its acquisition of Fortress Investment Group LLC, according to two people familiar with the matter. And it already agreed to national security conditions for its 2013 acquisition of Sprint, as did Bonn-based Deutsche Telekom AG when it bought T-Mobile.
In addition to being foreign-owned, the carriers operate in one of the most important industries in the eyes of U.S. security officials. Even though SoftBank is based in Japan, an American ally, that’s not enough to ensure CFIUS approval, according to Shawn Cooley, a lawyer at Freshfields Bruckhaus Deringer LLP in Washington who works on cross-border deals. In March, Trump blocked Singapore-based Broadcom Ltd. from acquiring chipmaker Qualcomm Inc. because of concerns that the deal could indirectly give China an edge.
"Investors from allied countries can no longer be confident that their host country’s status as an ally is sufficient to get through CFIUS," said Cooley, who previously worked on security reviews while at the Department of Homeland Security. "CFIUS is expanding its area of concern beyond the threats posed by the host country."
SoftBank’s Son has been undaunted in his vision to merge Sprint with T-Mobile, which he has had his eye on since 2012. After being rebuffed by antitrust officials in 2014, Son came back with the latest deal in hopes of getting a friendlier reception in Trump’s Washington. After the election he visited the president-elect in Trump Tower, promising to invest $50 billion in the U.S. and create 50,000 jobs.
While Son has been the main cheerleader for the deal, Deutsche Telekom will run the show. The German telecommunications giant will control nearly 70 percent of the company because SoftBank -- which will have a 27 percent stake -- agreed to cede its voting power.
T-Mobile chairman Tim Hoettges will be chairman of the new company’s board of directors. SoftBank is slated to have four board members out of 14, with two of those seats reserved for Son and Sprint Chief Executive Officer Marcelo Claure. While Deutsche Telekom will vote SoftBank’s stake on shareholder matters, Son and Claure would be free to cast their own votes on the board, according to one of the people familiar with the matter.
SoftBank has agreed to national security conditions on earlier deals. In its acquisition of Sprint, SoftBank allowed the U.S. to review and approve equipment vendors and agreed to remove "certain equipment" in its Clearwire network, according to a Sprint regulatory filing. Clearwire at the time used parts sold by Huawei.
That agreement could be revised or extended to the enlarged company resulting from the merger with T-Mobile, lawyers who work on CFIUS deals said.
In the acquisition of Fortress, an alternative-asset manager, CFIUS’s concerns stemmed in part from the scope of businesses owned by both Fortress and SoftBank, more so than a specific asset, according to the two people. The breadth of those holdings worried the committee about potential security risks going forward, said the people, who asked not to be named because the review isn’t public. CFIUS restricted SoftBank’s control over Fortress, the people said.
Representatives for SoftBank and Fortress declined to comment on that review.
SoftBank’s acquisition of Fortress was part of a buying spree by Son. His Vision Fund has taken stakes in scores of technology firms, including Uber Technologies Inc., which is also under review by CFIUS, one of the people said. Other SoftBank purchases also have cleared CFIUS, including its acquisition of semiconductor-design firm ARM Holdings Plc, the person said.
SoftBank’s past success in getting CFIUS approval bodes well for the T-Mobile review, according to Cooley from Freshfields.
"SoftBank has been there before and has successfully navigated it with Sprint, so despite being in the crosshairs on some recent deals, I still see no reason to believe that they couldn’t successfully navigate it this time," he said.
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