The news this weekend that T-Mobile (TMUS) and Sprint (S) will merge in a $26 billion all-stock deal was met with skepticism about whether regulators will sign off on a transaction that combines America’s third- and fourth-largest wireless providers.
For one thing, the Trump administration is already fighting a merger involving a major telecom, AT&T (T), which is buying entertainment giant Time Warner (TWX). Unlike the AT&T/Time Warner deal, the T-Mobile/Sprint deal would marry two direct competitors — and it may remind regulators of another proposed telecom deal that got crushed.
“Whatever arguments these parties make will be received with AT&T/T-Mobile in memory,” said Christopher Sagers, an antitrust expert and professor at Cleveland-Marshall College of Law, referring to AT&T’s decision in 2011 to abandon its deal to buy T-Mobile amid opposition from the Obama administration.
At the time, Sprint also filed a suit to block the proposed merger of its rivals, dubbing it “brazenly anti-competitive.” As Eleanor Fox, an antitrust expert at New York University Law School, noted in an email to Yahoo Finance, “Sprint has to be careful that it is not contradicting anything it said in its lawsuit to stop AT&T/T-Mobile.”
‘T-Mobile actually thrived quite nicely’
When announcing the merger, T-Mobile CEO John Legere, who would remain CEO under a combined company called T-Mobile, said the deal would benefit consumers by allowing for the creation of a nationwide 5G network. Neither company would be able to do this on its own, he contends.
This argument could very well appeal to antitrust regulators, according to George Hay, an antitrust expert and professor at Cornell Law School. “In a network industry … it’s pretty easy to see why the density of the network really does make a big difference,” said Hay, noting that T-Mobile and Sprint could argue that the deal would allow them to provide better coverage for consumers and better compete against AT&T and Verizon (Verizon is the parent company of Yahoo Finance).
Memories of the scuttled AT&T/T-Mobile deal could still loom large while regulators scrutinize this deal, according to Sagers. In August 2011, Obama’s Justice Department sued to block that deal and contended that it would harm consumers by eliminating a low-cost competitor. In fighting the DOJ lawsuit, AT&T pointed out that T-Mobile had lost subscribers despite an increased demand for wireless services — a suggestion that T-Mobile might continue to flounder on its own.
But that reality wasn’t borne out, Sagers noted. “It was widely perceived following that experience that T-Mobile actually thrived quite nicely after that merger was rejected, and provided serious competition to the other major firms,” Sagers said.
He added: “That is, in the memories of most enforcers, it will seem like blocking that 2011 deal was a good idea, the wisdom of it being proven by the industry’s subsequent experience, and I expect it will be hard to convince those folks that this situation is different.”
Will this time be different?
Of course, T-Mobile and Sprint will likely argue that this time is, in fact, different from 2011 — notably because this deal would combine the third- and fourth-largest carriers rather than the top two, and because it would give them the capacity to provide 5G wireless to a greater number of consumers.
Regulators might not buy those arguments, though. “To me it sure still sounds like a 4:3 horizontal merger in wireless,” said Sagers, referring to a merger of direct competitors. “The fact that it’s the smallest of the four carriers merging doesn’t make it legal, nor does it really matter that the resulting firm would still only be the third largest.”
If T-Mobile and Sprint try to convince regulators the deal will reduce costs and accelerate investment in 5G, they will be making what’s known as an “efficiencies argument.” In other words, they’ll argue that the combined entity would save money and ultimately benefit consumers.
But, as antitrust expert and Seattle University School of Law professor John Kirkwood noted, “The problem is that efficiencies have never justified an otherwise anticompetitive merger. Whenever a court has found that a merger of for-profit companies is likely to reduce competition, it has never found that efficiencies saved the transaction.”
Ultimately, Kirkwood said, T-Mobile and Sprint will have to show that not only will the deal result in a more efficient combined company but also that it won’t reduce competition. That could be a tough argument to make when the deal will pare America’s big four wireless carriers down to three.
Striking a particularly skeptical note, Randy Stutz, associate general counsel of the American Antitrust Institute, said, “This may well prove to be one of those deals that never should have left the boardroom.”
Sprint and T-Mobile did not immediately respond to a request for comment Monday morning.
Erin Fuchs is deputy managing editor at Yahoo Finance.