At the end of last week, news emerged that Sprint Corporation was studying the regulatory environment ahead of a potential takeover bid for T-Mobile US. A merger would create a scaled third player in the US mobile market to take on giants AT&T and…
At the end of last week, news emerged that Sprint Corporation was studying the regulatory environment ahead of a potential takeover bid for T-Mobile US.
A merger would create a scaled third player in the US mobile market to take on giants AT&T and Verizon Wireless.
However, a deal would also reduce the number of wireless network operators in the US from four to three, and attract the attention of the Department of Justice (DoJ) and the Federal Communications Commission (FCC) as a result.
A number of analysts have suggested that Sprint may have purposefully leaked the news in a bid to test the regulatory environment.
In a note MoffettNathanson analyst Craig Moffett said that “by piquing the discussion, [Sprint] presumably hope[s] to find out if a deal could or couldn’t get done”.
While regulators have stayed quiet, a consensus has formed amongst analysts that a deal would face serious difficulties.
Should Sprint make an offer for T-Mobile in 2014, it would be the second operator in the last three years to try and buy the Deutsche Telekom (DT) subsidiary. AT&T failed to acquire the challenger for US$39bn in 2011.
The incumbent was forced to withdraw its offer after political and regulatory pressure and had to pay Deutsche Telekom US$6bn in break-up fees, made up of cash and spectrum. The DOJ made it clear at the time that it wanted a four player market.
At the start of December the FCC’s new chair praised that course of action and said that subsequently smaller players T-Mobile and Sprint had both attracted more investment.
New Street Research analyst Jonathan Chaplin wrote that Wheeler’s early remarks have sent a message that despite his lobbying past, he’s not the “CTIA [Wireless Association]’s handmaiden”.
Moffett agreed, saying: “For FCC Chairman Tom Wheeler, who entered the FCC … amidst lingering suspicions that he might be too ‘industry-friendly’…approval of a Sprint/T-Mobile deal would be viewed as a clear validation of those fears.”
DT is reported to be wary of the US regulatory environment given its experience trying to offload T-Mobile to AT&T. Bernstein Research analyst Robin Bienenstock commented: “Stung by one regulatory failure, DT is likely to insist on pretty high hurdles and break fees before entering into any agreement.”
Chaplin also said that beyond the competition implications for wireless, a merger does not look good.
“This is a deal between two companies in a consumer visible industry – the optics are bad,” he commented. A deal would have a better chance of approval if a Republican is voted into the White House in 2016, Chaplin added.
Another argument for leaving the merger for a few years is the US’ upcoming incentive auction of 600 MHz spectrum, scheduled for mid-2015.
“We believe the FCC would be loath to allow a deal before the two big spectrum auctions pending in 2014 and 2015,” Chaplin said.
Moffett said he had spoken to a former FCC employee who felt that a merger would rob the auction of at least one probable bidder – it could be two if the merged Sprint/T-Mobile is highly leveraged due to the amount of debt needed to fund a takeover.
The auction is expected be the key event of Wheeler’s four-year term and he may ultimately be judged on its success or failure. With that in mind the regulator may be more amenable after the tender.
Yet that would throw up another issue: the amount of spectrum a combined Sprint/T-Mobile would hold.
A merged operator would hold an average of 291 MHz across the US largest wireless markets, dwarfing AT&T and Verizon, which would have 121 MHz and 109 MHz respectively.
And that disparity would likely grow wider if the deal happened after the 600 MHz sale. However, the FCC is already talking about imposing spectrum caps.
Perhaps the biggest hurdle for the operators would be in persuading the regulators that they needed to merge. T-Mobile’s performance has picked up since its merger with MetroPCS and is proving itself as a genuine challenger. Meanwhile Sprint, newly capitalised after being bought by Softbank, is making major investments in its network and is not struggling to raise capital.
A four player market appears to be functioning well. As Chaplin points out, there is “very little incentive [for regulators] to risk the potential consumer harm that would come from further market concentration – there is no compelling policy reason to allow a deal at the moment”.
That being said Bienenstock point out that the FCC’s new chair is yet to say whether a market comprising two weak and two strong players is better or worse than that of three roughly equal-sized players.
