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9 January 2020

Sprint/TMO deal hangs in the balance after antitrust trial

The shape of the 5G landscape in the US in 2020 and beyond is hard to predict until one decision is made – whether Sprint and T-Mobile USA will be allowed to merge. If they do, there will be a far bigger challenger for AT&T and Verizon, plus they will divest customers and spectrum to Dish Network and enable a fourth major 5G operator.

Yet the outcome remains uncertain. The deal has passed most regulatory hurdles but faces a significant legal challenge from a group of 13 states, plus the District of Columbia, which some analysts believe will derail the transaction. That could spark many potential knock-on effects if appeals failed – a new buyer for Sprint and/or TMO, perhaps from the cable sector; Dish quitting the market or being acquired itself; and so on.

The states attorneys general mounted their challenge in a 10-day antitrust “trial of the century” which was held last month in New York City. The heart of their opposition is that the merger will reduce consumer choice since, in some parts of their states, there are currently only two services available, and that would be reduced to one (this is why other acquirers of Sprint or TMO would not face the same challenge).

One of the Wall Street research firms which attended the trial, Cowen, concluded that the merger was now very likely to fail. The states argued that the deal is anti-competitive and enabling Dish as a fourth MNO is not sufficient to address that issue, because Dish will not necessarily operate in the areas where consumer choice will be most reduced.

Closing arguments are due next week, and Judge Victor Marrero’s ruling is expected in February or March. But in a note to investors, Cowen analyst Paul Gallant was already voicing the opinion that the states had made their case, and giving them a 60% likelihood of winning, and so blocking the deal.

“The states very likely did this by showing that the wireless market today is already ‘highly concentrated’ by market share and the merger would make it more so,” Gallant wrote. “T-Mobile tried to get Judge Marrero to include MVNOs as additional competitors beyond the Big four (which would reduce the HHI below ‘highly concentrated’). But both the parties’ private texts and Marrero’s own questions repeatedly referred to this as a ‘four to three merger’ – and Judge Marrero allowed in the FCC’s conclusion that MVNOs don’t count as real competitors. So we believe the states met their initial burden of proof.”

Another Wall Street analyst firm, New Street Research, also thinks the states are ahead. In a client note on December 23, Blair Levin wrote: “We continue to believe it is a close case, but the states have a better chance of succeeding than the companies. We will be re-evaluating as we read the proposed findings of fact and law, and then again as we listen to the closing arguments.”

Analysts Walter Piecyk and Joe Galone of LightShed Partners were more hopeful for the two operators, questioning whether the states had made a case that was so compelling that a district court judge would go against the decisions of two federal agencies (the FCC and Department of Justice) to green-light the merger.

Although observers said Dish chairman Charlie Ergen gave strong testimony for the operators, Gallant believes this will not carry significant weight because Dish will take four years to reach 70% coverage with its planned 5G network, while Judge Marrero has adopted 2-3 years as his legal timeframe for the case.

Another issue is that Dish’s build-out will rely on T-Mobile. “We counted three times that Judge Marrero asked witnesses about T-Mobile’s incentive to prevent Dish from succeeding in wireless,” Gallant wrote.

Finally, Gallant wrote: “T-Mobile testified that both it and Sprint are currently sub-scale to AT&T and Verizon, which later led Judge Marrero to question whether Dish – with 9m initial Boost customers – could truly compete if Sprint can’t with 50m. While all of these arguments do not negate the Dish fix, we think they give Judge Marrero sufficient ammunition not to credit Dish as a sufficient remedy, and we interpreted some of Judge Marrero’s own questions as agreeing with at least some of these critiques.”