Earlier this month, reports emerged that the Department of Justice’s antitrust staff has informed the officials at T-Mobile and Sprint that their proposed $26.5 billion merger may get rejected in its present form.
Although there is no official word from either the DOJ or the two telecom companies, it is believed that the DOJ has not made any recommendations for making changes to the deal. The above report was denied and therefore, the alerts that the telecom executives have received are believed to be informal at this point.
For those who have been following the T-Mobile and Sprint merger for quite some time, this is a déjà vu moment. The last time T-Mobile and Sprint tried to merge was in 2017, the deal fell through. Previously, in 2011, the Obama administration had blocked T-Mobile’s takeover by AT&T for a whopping $39 billion.
Arguably, a lot has changed since then. In fact, Spring and T-Mobile are relying on these changes to power their deal through the legal hurdles.
Competition vs. Anticompetition
The telecom industry has consolidated tremendously over the past few years. Verizon commands 34.91% market share of the wireless carrier network industry. AT&T occupies 34.07%, while T-Mobile and Sprint own about 17.51% and 12.13% of the market share respectively. The others are virtually irrelevant. These top four players own more than 98% of the market. With the merging of #3 and #4, this market would be further consolidated.
As a rule, the more players there are in an industry, the better the prices, and services. The merger would leave only 3 major players in the industry and so naturally, authorities are jittery over giving the deal a GO.
However, Sprint has argued that its financials are weak and that it is not on a “sustainable competitive path”. It is claiming that it is losing customers fast and its revenues are dropping. Without the merger, it may as well find itself in a dire situation, in which case the market will be left with only three players anyway. T-mobile also made a pledge to keep prices where they are should the merger go through.
The 5G Revolution
The advent of 5G has given Sprint a compelling reason to put its case forward. Individually, T-Mobile and Sprint enjoy a much smaller presence across the country in comparison to the top 2 in the business. When combined, they would be big enough to challenge the dominance of their two bigger rivals. Sprint is arguing that the merger would give it the necessary resources to deploy super fast 5G network infrastructure across the country. Without the merger, both T-Mobile and Sprint would not be able to create enough infrastructure to compete against Verizon and AT&T. This, they argue, would ultimately be a huge disadvantage to the consumers who will be forced to choose between only two services.
The Obama administration had bolstered antitrust oversight, which ultimately led to the failed takeover of T-Mobile by AT&T. However, the present administration in the White House is largely perceived to be favorable to businesses. There is talk of the 5G rollout alone creating 3 million jobs and adding $500 billion to the economy. T-Mobile and Sprint argue that the merger will result in tremendous efficiencies for the combined entity – a claim that DOJ has apparently not bought.
There is a good chance that the deal will pass the scrutiny of the federal authorities, possibly after some changes. However, the states may take the recourse of a lawsuit to block the deal. More than a dozen states are currently involved in talks to block the deal even if it finds favor in the federal establishment.
DOJ may be signaling to some restructuring of the deal in order for it to go through. That could potentially take months. Then there is the matter of potential lawsuit by the states. There’s no telling how long that could take. In any case, the merger is not likely to happen in time to get the T-Mobile and Sprint party to coincide with the 5G rollout that has already begun in the US. If, and when they do, it might just be too late already. And the catch up game will begin.