T-Mobile’s Sprint deal to face several hurdles before approval

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Several analysts have revealed their comments on the decision of T-Mobile to make one more attempt to buy Sprint — for $26 billion.

T-Mobile will own 41.7 percent stake in the combined telecom business, Softbank will own 27.4 percent stake and 30.9 percent will be with the public.

The deal shows that SoftBank was in a bad position to get out of Sprint which has more than $32 billion debt.

“SoftBank CEO Masayoshi Son has earlier rejected a deal with T-Mobile four months ago that was better for him than the deal he is taking now,” said Jonathan Chaplin at New Street Research.
USA mobile subscriber base 2017
The main concern for telecom regulator FCC and other agencies would be the presence of two foreign companies – Deutsche Telekom of Germany and SoftBank of Japan — in the US wireless market.

Analysts feel that FCC should not block the Sprint-T-Mobile deal considering the fact that Vodafone Group of UK had a significant stake in Verizon Wireless, the number one wireless operator in U.S.

Two U.S. House Democrats asked for a hearing on the merger. Representatives Frank Pallone and Mike Doyle said in a statement: “The combined company would be overwhelmingly controlled by foreign entities and this transaction also raises significant questions about foreign control of major players in the U.S. wireless market.”

Seth Wallis-Jones, principal research analyst, Service Providers & Platforms at IHS Markit  said the lack of a breakup fee as a result of regulatory blocks is indicative of the significant possibility that the deal will face regulatory headwinds. A previous attempt at merging in 2014 was abandoned due to regulatory opposition from the Obama administration.

“While a Republican administration is usually viewed as conducive to passing mergers, the telecoms industry has faced some resistance to large, vertically integrative mergers that would usually attract less scrutiny than a horizontal consolidation deal as this,” Seth Wallis-Jones said.

TBR analyst Steve Vachon said the negative impacts of reduced wireless competition could be the strongest barrier to approval. Though T-Mobile claims the merger would spur greater cost savings for customers, the combined company would be less pressured to offer reduced rates without the aggressive pricing tactics of Sprint with which to contend.

TBR said the deal will likely be met with resistance from the Department of Justice, with concessions mandated before the deal is finalized. Possible concessions include labor retention and spectrum divestiture requirements as well as favorable MVNO agreements to support new entrants into the wireless market, such as cable providers.

The merger would disrupt the pay-TV industry, as the combined company would have a base of over 125 million wireless subscribers to which it could cross-sell its upcoming Layer3 TV video platform, resulting in deeper video subscriber losses for cable providers.

The merge of Sprint and T-Mobile would also intensify competition for new cable MVNOs entering the market, most notably Comcast’s Xfinity Mobile and Charter Communication’s  upcoming wireless service.

The Justice Department’s antitrust chief, Makan Delrahim, has expressed opposition to “behavioral remedies,” preferring structural changes to ensure deals are not anti-competitive. Changes the government may require could take away from the $6 billion in run-rate synergies, Macquarie analysts said.

“The lack of a break-up fee suggests that both companies are willing to ‘give it a try’ from a regulatory point of view given the very significant synergies opportunities,” Morgan Stanley analyst Simon Flannery said.

Under their contract, T-Mobile is still liable to pay Sprint a $600 million fee if it walks away from the deal despite it having been cleared by regulators and met other requirements to close, Reuters reported.

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