(Bloomberg) -- Sprint Corp.’s argument that it will be left a corporate weakling if it’s not allowed to merge with T-Mobile US Inc. is meeting resistance from some U.S. officials vetting the $26.5 billion wireless deal.
Sprint is telling regulators behind closed doors that it won’t be an effective competitor if they block the merger, according to five people familiar with the matter. Some officials are skeptical of that argument, four of the people said. One of the people said Sprint asserted it may eventually run out of cash if the merger fails.
Shares of both companies dropped.
Sprint’s argument that it needs the deal to compete is “relatively weak” and “probably isn’t enough to get a merger through that’s anti-competitive,” said Fred Campbell, a former chief of the wireless bureau at the Federal Communications Commission.
The transaction between the No. 3 and No. 4 wireless carriers would shrink the national U.S. mobile market to three players. Critics say the reduction would harm competition and lead to higher prices. T-Mobile and Sprint say that together they can more quickly to build a fast, advanced next-generation system known as 5G and more effectively take on industry leaders AT&T Inc. and Verizon Communications Inc.
Sprint Chief Executive Officer Michel Combes told FCC officials in meetings on March 14 that the agency should pay more attention to his message of distress than to optimistic earnings outlooks from the company, two of the people said. In at least one meeting, Combes said he wasn’t making a case that Sprint is a failing firm that’s in danger of collapsing without the merger, one of the people said. Still, the company is warning that its prospects for growth are grim, said another person.
Sprint says it hasn’t changed its tune.
“Our communications have been consistent about the progress we’ve made over the past few years and the significant challenges we still face,” David Tovar, a company spokesman, said in an email. “As we have said publicly, only the proposed merger can create a new company that will deploy a world class 5G network that will provide better service in all corners of the country and drive prices down for consumers.”
While antitrust officials would consider a so-called failing firm argument -- a scenario that could lead to the loss of a competitor -- Sprint’s claims of weak prospects don’t rise to that level, the people said.
Sprint dropped 3.1 percent to $5.85 and T-Mobile was off 3.8 percent, at $69.84, at 11:21 a.m. New York time.
Justice Department lawyers are listening to Sprint’s arguments about how the merger would accelerate the deployment of next generation wireless technology and benefit consumers, but haven’t reached a decision about how much weight to give that view, according to one of the people familiar.
T-Mobile has asserted that the deal will help the U.S. become a leader in the development of 5G technology. The Justice Department’s antitrust division doesn’t consider U.S. industrial policy in merger reviews and only looks at whether a deal harms competition, Andrew Finch, a top official in the unit, said at a conference Wednesday without referring to the proposed merger with Sprint.
The FCC and the Justice Department, both of which are reviewing the deal, declined to comment.
T-Mobile’s bid for Sprint marks at least the third time the companies have attempted to merge. Earlier efforts were spurned by appointees of Democrat President Barack Obama who said losing a fourth national competitor threatened to undermine competition.
The appointees vetting the deal under President Donald Trump hold a different view. Justice Department antitrust chief Makan Delrahim and FCC Chairman Ajit Pai have both said they’re not wed to a certain number of national competitors, without passing judgment on the current transaction.
Sprint surpassed wireless-subscriber growth estimates in earnings released Jan. 31, allaying concerns that the carrier is in trouble. Combes in remarks to investors cited the “continued execution of our plan to balance customer growth and profitability while improving network performance.” Revenue went up, as did spending on the network, and the number of customers grew, Combes said.
Still, Combes said on an earnings call that Sprint doesn’t have the scale to keep pace with investments by AT&T and Verizon and lacks the airwaves needed to offer coverage comparable to that of the larger carriers.
Sprint Executive Chairman Marcelo Claure told Congress March 12 that Sprint “is no longer in financial dire straits but we still do face serious challenges,” including poor network quality that can’t be fixed due to shaky finances and a lack of appropriate airwaves.
“There’s no way that we can invest and be able to compete at the same level” as AT&T and Verizon, Claure said at a hearing.
(Updates with share prices in tenth paragraph.)
--With assistance from Scott Moritz.
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