Sprint/T-Mobile Possible, But It Would Face an Uphill Climb at FCC and DOJ, Industry Observers Say

Then FCC Chairman Michael Powell all but welcomed a Sprint/Nextel merger after it was announced in late 2004 on the grounds that it would preserve the company as a tough competitor. Federal regulators approved that transaction eight months later. But industry observers don’t expect a similarly warm reception to a deal that would lead to still further consolidation of the wireless sector.

"On the one hand, proponents of such a combination will argue that it is needed to create a very strong number three to compete against AT&T and Verizon better,” said former FCC Commissioner Robert McDowell in an interview Monday. “But on the other hand, the administration has created the narrative that says four national carriers is the right number and since the AT&T/T-Mobile merger was shot down and Softbank bought Sprint, both number three and four are a lot stronger than they were two or three years ago.” McDowell said the outcome was uncertain. “It’s possible a combination could be approved, but it would have to overcome a lot of hurdles including the commission’s own wireless competition report, which concluded that the U.S. wireless market was highly concentrated,” he said.

Free Press would have to “seriously consider” filing a petition to deny with the FCC against a Sprint/T-Mobile merger, said policy director Matt Wood. The group said in a statement Friday that it was opposed to a possible merger. Although “Sprint is not AT&T,” a Sprint/T-Mobile merger would face many of the same concerns from regulators and public interest groups over competition and antitrust issues that doomed AT&T’s attempted merger with T-Mobile in 2011, Wood told us. Both the FCC and the Department of Justice would have issues with a Sprint/T-Mobile merger, he said. A DOJ antitrust analysis would determine whether the deal would decrease competition in violation of federal antitrust statutes, while an FCC review would examine spectrum holdings and other indicators of market power to determine whether consumers would be harmed by a merger.

"Despite being a more palatable merger than AT&T/T-Mobile on pure antitrust grounds, we believe a Sprint/T-Mobile tie-up probably would face the same fate -- a challenge by DOJ and the FCC,” Guggenheim Partners analyst Paul Gallant said Monday in a research note. “We believe regulators are very pleased with T-Mobile’s resurgence and its aggressive, innovative moves and would not want to see it disappear via acquisition. And, in our view, DOJ’s recent approval of the … airline merger -- while having similar factual predicate -- does not portend the same outcome for Sprint/T-Mobile.” Gallant was referring to federal approval of a merger between American Airlines and US Airways. Federal regulators could certainly decide to allow a Sprint/T-Mobile merger to move forward if either carrier went into a “prolonged tailspin, but I don’t think we're anywhere near that point,” Gallant said in an interview. “At this point the Obama administration would be very reluctant for T-Mobile to be swallowed up given how well that carrier is doing these days."

Approval of a deal “is by no means a sure thing,” said Wells Fargo analyst Jennifer Fritzsche in a research note Monday. “In fact, we would not be surprised if this story was purposely leaked to begin to evaluate the pulse from regulators around such a possibility,” she wrote. “Based on our conversations with our D.C. contacts, we believe a deal may be easier to get done if one of the two players … were significantly operationally and financially challenged.” New Street Research offered similar comments. “While we wouldn’t be surprised that the two companies are having discussions (they have had merger talks in the recent past), we believe a deal in 2014 would face serious challenges,” the firm said. “A deal is more likely in 2016/2017, in our view.” Stifel Nicolaus said it thought DOJ would oppose a merger.

A Sprint/T-Mobile merger “may well happen down the line,” but such a merger is probably not desirable among federal regulators right now, said Medley Global Advisors analyst Jeffrey Silva. Both Sprint and T-Mobile have completed major deals in the past year, including Japanese telco SoftBank’s purchase of 78 percent of Sprint, Sprint’s buyout of Clearwire and T-Mobile’s merger with MetroPCS. Those deals particularly improved Sprint and T-Mobile’s spectrum holdings, which both carriers could improve even further through upcoming spectrum auctions, Silva said. Regulators “may want to see how these improved developments play out rather than going straight to considering a deal that eliminates a national carrier,” he said. “Of course, that calculus could change if either Sprint or T-Mobile were to falter in a significant way going forward."

A former FCC spectrum official noted that T-Mobile and Sprint are favorites of many in the public interest community. “Even considering the double standard that continuously benefits these two carriers, as opposed to Verizon and AT&T, any argument that these two companies cannot survive absent a merger falls flat given SoftBank’s resuscitation of Sprint and T-Mobile’s strong numbers post-MetroPCS acquisition,” the lawyer said.

"I think it’s important to recognize that we are no longer living in a world where the slide to duopoly seems inevitable and therefore we need to let the third and fourth place carriers merge,” said Public Knowledge Senior Vice President Harold Feld. “In particular, if the FCC takes steps to get low-band spectrum in the hands of competitors, and acts to curb market power in the special access market, there is no reason why Sprint and T-Mobile could not continue to provide needed competition in the market. If this were following a failed 600 MHz auction, where AT&T and Verizon had cornered the market on low-band spectrum, then it would be one thing. But that is not the current reality. This does not look like an effort to stave off collapse, as when people discussed a possible Sprint/T-Mobile deal in 2010, but an effort to bulk up through acquisition at the expense of competition."

"Anytime there is a significant merger proposed in the communications marketplace it faces a lot of scrutiny from regulators and often competitors,” said Free State Foundation President Randolph May. “So that’s a safe bet. But I think it is wrong to set hard and fast benchmarks, such as there must be four national carriers. This type of thinking doesn’t account for the dynamism of the technology-driven environment or the fact that three strong competitors may be better for consumers than four. And, finally, it doesn’t take into account the fact that the wireless marketplace is part of an overall broader broadband marketplace in which services offered over the various technology platforms increasingly compete with each other.”(hbuskirk@warren-news.com),