Sprint Corp. suffered its worst stock decline in almost six months, rocked by fears that a proposed $26.5 billion takeover by T-Mobile US Inc. will get rejected by antitrust enforcers.
The deal, announced on Sunday, would combine two of the four biggest wireless carriers in the U.S. That sets the stage for an in-depth investigation by the Justice Department over whether the tie-up would harm competition in the industry, and some analysts are giving the transaction only 50-50 odds of passage.
The challenge is convincing regulators that the world has changed since 2014, when a merger of the two companies was firmly rebuffed by the Justice Department. Winning them over this time won’t be easy, even with a new administration in power.
“I find it hard, given the history, to see the DOJ not challenge it,” said David Turetsky, a former deputy assistant attorney general with the antitrust division. “It’s basically a four to three in the wireless industry. Even if they argue there are 10 players, they are still the top four.”
Shares of Sprint fell fell as much as 13 percent, to $5.63 each, sending them well below the roughly $6.62 price initially laid out in the deal. T-Mobile also slid, declining as much as 5.9 percent, to $60.72.
Sprint had been climbing in recent weeks, lifted by speculation that T-Mobile would make a merger offer. The swift tumble on Monday suggests that investors hadn’t thought through how viable an actual deal would be.
It’s also notable that the transaction terms don’t include a breakup fee, suggesting that negotiators didn’t want to make it too onerous if the deal has to be terminated. There’s a history in the industry of painful breakup payments: AT&T Inc. agreed to pay a fee of about $6 billion in cash and assets when it tried to buy T-Mobile in 2011.
Wells Fargo & Co. analyst Jennifer Fritzsche helped set the pessimistic tone early in the day, when she downgraded both Sprint and T-Mobile—even though she thinks the merger would create a well-positioned company.
“The message from our regulatory contacts was simple—‘this won’t be easy,’” she said in a report.
Moving Toward 5G
Sprint and T-Mobile have complementary wireless spectrum that may be a strategic advantage as the companies build a 5G network. T-Mobile controls a large portfolio of lower-band airwaves that can travel long distances and pass through walls and windows. Sprint has the largest U.S. holding of higher-band, 2.5-gigahertz spectrum that can handle more data capacity but over limited distances.
“The companies will argue that only together will they be able to make the requisite investments in 5G, and there’s probably a fair amount of truth to that,” said Craig Moffett, an analyst at MoffettNathanson LLC.
Sprint is controlled by Tokyo-based SoftBank Group Corp. and T-Mobile is owned by Germany’s Deutsche Telekom AG, which will have the biggest stake in the combined entity. Foreign ownership of the combined company could expose the proposed merger to scrutiny by a secretive national security panel that reviews acquisitions of U.S. businesses by foreign investors.
Sprint’s CEO stands to get $78 million in T-Mobile deal wins approval
In addition to the Justice Department, the $26.5 billion deal will need approval from the Federal Communications Commission. During the Obama administration, both agencies took the position that competition could be harmed if the number of national carriers went down to three from four. President Donald Trump’s new FCC chairman, Ajit Pai, has said he remains open about the number of major players in the U.S. mobile market. That stance appears to leave the Justice Department as the major hurdle.
“We continue to believe the likelihood of a Sprint/T-Mobile deal approval is less than 50 percent based on criteria that we believe the DOJ would apply,” RBC Capital Markets analyst Jonathan Atkin said in a note Monday.
The merger is already drawing criticism from those who say the tie-up risks undermining competition that has been fueled by having four carriers in the market. Senator Amy Klobuchar, a Minnesota Democrat who serves on the Judiciary Committee’s antitrust panel, said in a statement she’s concerned that further consolidation will threaten consumer benefits.
“Competition among the four largest cell-phone carriers has led to lower prices, better service and more innovation,” she said in a statement.
Gigi Sohn, a fellow at the Georgetown Law Institute for Technology Law & Policy, called the companies “feisty competitors” to Verizon and AT&T.
“Consumers will be the losers if T-Mobile and Sprint are allowed to merge,” she said. “This combination will not only result in less choice for consumers, it will provide greater incentive for the three remaining companies to act in concert.”
In a preview of their pitch to Washington, D.C., Sprint and T-Mobile are pointing to widening competition from cable companies like Comcast Corp. and Charter Communications Inc., which have deals that let them resell wireless service using Verizon’s network in their respective territories. They’ve also announced a partnership to build the underlying technology for their mobile-phone offerings.
“In reality, this industry is no longer just four wireless companies,” Sprint CEO Marcelo Claure said in a video laying out the benefits of the deal. “It’s not the Big Four anymore, it’s the Big Seven or Eight.”
Claure is poised to collect about $78 million if shareholders and regulators approve the deal. Claure, 47, has a long-term award of 10 million Sprint shares, worth $66.2 million at the offer price, according to data compiled by Bloomberg. The stock will fully vest if he’s terminated within 18 months of the deal’s completion, or if his responsibilities change materially. He’s also eligible for cash severance of about $11.6 million and $54,000 of other benefits.
The Sprint CEO is overstating the degree of competition coming from cable companies and other wireless resellers, said Andrew Jay Schwartzman, an attorney at Georgetown University Law Center’s Institute for Public Representation.
Another hurdle for Sprint and T-Mobile is the view inside the Justice Department that consumers have benefited from four major players in the wireless market, which was made possible thanks to the government’s successful block of AT&T’s deal to buy T-Mobile in 2011, Schwartzman said.
Still, now might be their best shot at approval.
“This is certainly a deal they’d want to do in a Republican administration and preferably with a Republican Congress,” Schwartzman said. “That created a huge imperative to do it now.”