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T-Mobile’s Sprint Deal Looks Iffy to Traders as Skepticism Grows

Scott Moritz

(Bloomberg) -- Wall Street is increasingly pessimistic that T-Mobile US Inc. will complete its $26.5 billion takeover of Sprint Corp., with the spread on the deal at the highest point since it was announced in 2018.

The spread between T-Mobile’s offer price for Sprint and the trading price, an indication of the deal’s risk, has swelled to $2.85 a share on Thursday from a low of 53 cents in May 2018.

The key impediment to the transaction, which the U.S. Justice Department and the Federal Communications Commission have already OK’d, is a court challenge brought by Democratic attorneys general from 13 states and the District of Columbia. They maintain that the combination would harm consumers through higher prices and weaker service.

Based on two weeks of court testimony last month and the nature of the questions U.S. District Judge Victor Marrero asked during the proceedings, Cowen & Co. analyst Paul Gallant sees a 60% chance the ruling will favor the states, according to a note Thursday.

Shares of T-Mobile and Sprint were little changed Thursday, but Sprint has slumped 35% since a recent peak in July, while T-Mobile is down less than 7% over the same period.

Industry’s Fate

The case will help determine the fate of the U.S. wireless industry as the two smaller national carriers seek to combine into a more effective competitor to Verizon Communications Inc. and AT&T Inc.

The pivotal question is whether the combination of T-Mobile and Sprint would simply shrink the playing field to three national carriers, or if, under a plan approved by U.S. regulators, Dish Network Corp. would set up an effective new wireless carrier with assets bought from Sprint and T-Mobile.

The attorneys general may have successfully framed the issue as too much industry concentration, said Gallant, a former legal adviser to the FCC. “Both the parties’ private texts and Marrero’s own questions repeatedly referred to this as a ‘four to three merger,’” Gallant wrote. If so, that “probably met their initial burden of proof.”

The companies have tried to address the concerns about higher prices. To win approval of the merger, T-Mobile has pledged to freeze prices for three years, offer free wireless broadband access to 10 million underserved students and roll out a new $15-a-month data plan capped at 2 gigabytes.

It’s not clear if Judge Marrero views consolidation as necessarily translating to higher prices, and he expressed doubts about unilateral price increases.

Carl Shapiro, an economics professor at the University of California at Berkeley, testified as a expert witness for the states, saying the merger would cost consumers as much as $8.7 billion more. After his testimony, Marrero asked him if the wireless companies would “be so bold” as to raise prices after the merger without also offering better services.

Closing arguments are expected later this month, and a ruling could come as early as February.

--With assistance from Erik Larson.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, John J. Edwards III, Rob Golum

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