(Bloomberg Opinion) -- T-Mobile US Inc. is in a pickle. Antitrust officials say that if it wants permission to buy Sprint Corp., it needs to help create a new competitor to fill the hole in the market that Sprint would leave behind. But then, what would be the point of their merger?
The U.S. Department of Justice wants the companies “to lay the groundwork for a new wireless carrier,” a full-fledged national operator with its own network that may help keep prices down for customers after T-Mobile and Sprint become one, Bloomberg News reported Wednesday, citing a person familiar with the matter. It’s an ultimatum that just might kill the deal. Sprint shares slid for a third day.
The head of the Federal Communications Commission recently endorsed the merger following a limited set of concessions from the companies, some of which may be difficult for the FCC to actually enforce. The most concrete part of their truce is divesting Sprint’s Boost Mobile prepaid brand so that the combined entity doesn’t become too dominant in that portion of the market, which offers pay-as-you-go services for lower-income Americans.
But the DOJ, for its part, is looking at the bigger picture (as I predicted it would). That is, it’s focused on whether reducing the U.S. wireless market from four to three national carriers will hurt competition. The DOJ seems to have determined that yes, it will, and that the agreement its counterparts at the FCC struck with T-Mobile doesn’t assuage those concerns. It’s again notable that shares of AT&T Inc. and Verizon Communications Inc. fell on Wednesday; investors expect consolidation to benefit the industry as a whole in terms of bringing back pricing power, which from a regulatory standpoint argues against allowing T-Mobile and Sprint to combine.
The problem with the DOJ’s proposal – for T-Mobile to essentially spin off some assets and create a new viable competitor – is that such terms may be entirely unpalatable to the company, and it’s unclear who this strengthened rival would be. In theory, a combined T-Mobile-Sprint could sell back some government spectrum licenses and arrange what’s known as an MVNO (mobile virtual network operator) agreement, in which another company such as a cable operator pays wholesale to resell wireless service using the national carrier’s network under its own brand name. For example, Comcast Corp. and Charter Communications Inc. have each launched their own wireless services – Xfinity Mobile and Spectrum Mobile – that use a combination of Verizon’s expansive data network and their own Wi-Fi hotspots. Dish Network Corp., the industry’s awkward outsider that’s always wanted a seat at the table, is one such candidate for a T-Mobile MVNO until it builds out its own network. Tech giants such as Facebook Inc. and Alphabet Inc.’s Google are other possibilities.
Later on Wednesday, Bloomberg News reported that T-Mobile and Sprint are considering selling some airwaves and that Comcast and Charter are interested in the assets, as well as favorable wholesale agreements that might be part of the divestitures.
But allowing one of these deeper-pocketed companies to take the place of Sprint could leave T-Mobile worse off than just not doing the deal at all. In the absence of their merger, Sprint remains a very weak competitor whose market share T-Mobile can continue to chip away at until, inevitably, one of them gets acquired by another player. Charlie Ergen, the billionaire pulling the strings at Dish, is among the merger’s opponents and has more to gain from the deal failing than from structuring some sort of MVNO agreement with a combined company. A stand-alone T-Mobile or Sprint presents a potential merger partner or spectrum buyer for Dish, as well as hypothetical takeover targets for Comcast, Charter and the like. Altice USA Inc., which already has a wholesale agreement with Sprint, told the FCC on Tuesday that it also still opposes the merger and that T-Mobile’s latest commitments “offer nothing new.” Like Ergen, Altice’s controlling shareholder, Patrick Drahi, is likely watching the process closely in anticipation of his own opening should regulators scuttle the deal.
While the DOJ’s recent discussions with T-Mobile CEO John Legere and Sprint Executive Chairman Marcelo Claure are said to have been productive, it’s still hard to envision an outcome that’s satisfactory to all sides.
(Adds new details about possible airwave sales to Comcast and Charter in the sixth paragraph.)
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Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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