U.S. Markets closed

Can T-Mobile and Sprint Meet the Justice Department's Demands?

Adam Levy, The Motley Fool

In an effort to gain approval for their proposed $26 billion merger, T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) have agreed to a deal with Dish Network (NASDAQ: DISH). The deal, however -- which includes the sale of the Boost Mobile brand, spectrum licenses, and a long-term wholesale agreement to use the T-Mobile/Sprint network -- still might not be enough for the Justice Department, according to a report from CNBC.

The biggest point of contention is that the DOJ wants New T-Mobile -- as management is calling the company that would result from the merger -- to provide Dish unlimited access to its network. New T-Mobile wants to cap Dish Network's use to 12.5% of its total capacity. It also wants to put a limit on outside investments in Dish Network, capping strategic investors to owning a maximum of 5% in the satellite company.

T-Mobile CEO John Legere.

T-Mobile CEO John Legere. Image source: T-Mobile

Why T-Mobile needs the caps

T-Mobile has very valid reasons for wanting to limit Dish Network's use of its network. The wholesale licensing agreement will last six or seven years according to CNBC's sources, and during that time T-Mobile plans to build out a fast nationwide 5G network. What's more, it plans to use excess capacity on that network to provide home broadband internet service, eventually reaching more than 50% of the population.

As part of its promises to the FCC, New T-Mobile agreed to certain benchmarks for providing home internet service. It said it will offer service to 9.6 million households within three years, and 28 million within six years. Providing Dish with unlimited access to its network during that same period could stymie New T-Mobile's ability to properly serve the number of households it's promised the FCC.

The cap on strategic investors in Dish is meant to keep Dish from raising a lot of capital and building out its own competing network as quickly. If Dish has to move more slowly with its network buildout, then it'll give New T-Mobile more time to adjust to revenue losses resulting from the planned sale of its Boost Mobile customers -- and reduce the number of mobile customers it could lose to Dish in the short run.

Dish will still have access to capital from debt markets and smaller investors, and its own TV service operations produced about $1.1 billion in free cash flow over the trailing twelve months. Combined, Dish should be able to build out a competitive network in the time frame allotted by the six-to-seven-year wholesale agreement, but probably not much sooner.

The Justice Department's high demands

T-Mobile and Sprint have shown a lot of commitment to getting the deal done. With their rough agreement with Dish, it seems very close to getting the Justice Department's blessing.

The DOJ may be more stringent than it has been with other recent merger proposals due to the response from the public. 14 states have jointly filed a lawsuit against the merger, saying it will result in less competition and higher prices. For the Department of Justice to uphold its decision to approve the merger, it needs to be sure competition and pricing won't see a major impact. 

That means the DOJ needs to ensure a fourth competitor can establish itself in the market and compete for new customers, with a strong network to bring them in. Moreover, it needs to ensure the new competitor can do so in a way that's not cost-prohibitive in order to keep pricing pressure on the incumbents. 

Both T-Mobile and Dish ought to be happy with the terms in their rough agreement. There's a clear path to a fourth competitor without a Dish Network-owned Boost Mobile becoming a major burden to New T-Mobile's plans outside of phone service. But the extra attention being paid to this case has made the DOJ more cautious. That might require T-Mobile to give up a little bit more, but there should be room for the three companies and the DOJ to work things out so that everyone's happy.

More From The Motley Fool

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.