T-Mobile and Sprint spent months negotiating before finally agreeing to a proposed merger, but the hardest part hasn’t even come yet, writes The Wall Street Journal’s Drew Fitzgerald and Brent Kendall.
Now, the carriers have to convince U.S. regulators and antitrust enforcers that their $26 billion deal won’t negatively impact competition within the industry. When the companies proposed a merger in 2014, it scrapped its plans because government officials told executives an approval was unlikely.
If the merger’s approved, there’d be just three national wireless network operators in the U.S., which is why Obama administration regulators opposed it. Meanwhile, antitrust experts have debated if a more formidable third carrier would make the market more competitive than the current one, which comprises two giants—AT&T and Verizon and two smaller carriers, T-Mobile and Sprint, that continue to drive down prices.
The carriers don’t expect the proposed deal to be finalized until next year, as both the FCC and Justice Department antitrust officials have to review it. State officials will look at it, too.
Timing could also hamper the merger.
The fact the carriers may not receive approval until next year could be problematic in terms of 5G development. As Fierce Wireless editor Mike Dano points out, both Sprint and T-Mobile plan to conduct “business as usual” as they wait to get regulatory approvals they need to finalized the merger. Going about business as usual means they would continue to build out their respective 5G networks.
The problem with that is continuing to work separately could be a drain on both carriers’ efficiency and time. One of the merger’s biggest selling points was the union would allow the companies to build the, “mother of all networks” by combining T-Mobile’s 600 MHz holdings and Sprint’s 2.5GHz holding, along with a mix of the carriers’ mid-band spectrum assets.
While it seems like the ideal solution would be for both carriers to hold off any 5G development until they have a ruling, they can’t afford to do so because they know the decision could go either way. So instead, T-Mobile and Sprint will continue to sign their own tower and construction deals and focus on their own spectrum holdings. Both companies have plans to deploy 5G-T-Mobile’s goal is 30 cities by end of the year, Sprint pledged to launch a 5G network during the beginning of next year and is adding 2.5 GHz equipment to thousands of its towers to meet that deadline.
If the merger is approved, however, the carriers will have to decommission approximately 35,000 redundant macro towers and build 50,000 small cells—a significant increase from the 10,000 both companies have today, according to Dano. If regulators approve the deal, some of the 5G work the carriers have done would have to be reconsidered. While neither company wants to see any of work go to waste, they can’t stop working on their separate 5G rollouts because their merger is too uncertain.
The uncertainty will also effect T-Mobile CEO John Legere’s decision making, according to Dano. The FCC plans to auction millimeter wave spectrum in November, which Legere wants for T-Mobile’s 5G build out. In fact, T-Mobile wants that spectrum so badly it asked the FCC to auction several different mmWave spectrum bands simultaneously instead of one at a time as it currently plans to do.
Legere finds himself in a tough spot with the timing of the auction because regulators probably will not rule on the merger until after the auction is finished. Since Legere won’t know if he’ll have access to Sprint’s 2.5 GHz spectrum, he’ll have to bid on more mmWave than he might need in case T-Mobile ends up on his own. It’s a risk either way—if Legere doesn’t bid and the merger’s rejected he’s without the spectrum the company needs. If he does bid and merger goes through, he’ll have access mmWave spectrum he won’t be able to sell.
If T-Mobile and Sprint had agreed to a merger deal in November 2017 until May of this year, Legere might not have this timing issue. The companies could have realistically expected the merger to be approved within a year—in other words by time the mmWave auctions started.
Instead, competitors like AT&T and Verizon will have a whole year to plan their auction and 5G strategies without a merged competitor to worry about.
Analysts lean towards merger not happening.
T-Mobile and Sprint might be better served to continue working on their own separate 5G networks, because a merger approval seems unlikely according to some analysts.
“We believe there is less than a 40% chance the deal will be approved by regulators, as it is currently positioned,” BTIG Research’s Walter Piecyk wrote on April 30. “There is clearly much higher uncertainty with the current administration which could end up being a benefit to deal approval. However, uncertainty is not typically favorable for how investors discount the probability of a transaction closing.”
Meanwhile, MoffetNathanson pointed out the FCC and Department of Justice argued the country needs four wireless operators to ensure competition after it rejected AT&T’s attempt to acquire T-Mobile in 2011. “Seven years ago may seem like a lifetime on Wall Street, but it is a blink of an eye in Washington,” the analysts noted.
While Wells Fargo analysts believe Sprint and T-Mobile have good selling points for their merger, they still believe carriers have a tough road ahead of them.
“The message from our regulatory contacts was simple—‘this won’t be easy,’” the Wells Fargo analysts wrote in a report. “While we believe the messaging itself is quite compelling—job creation, infrastructure investment to keep up with China and the wireless industry moving beyond four players, the numbers become harder when looked at purely from a market concentration standpoint.”
It was not all bad news for the carriers however. Jeffries analysts believe the FCC is at least open to analyzing the merger on its merits, but admitted the DOJ could be a hurdle. Meanwhile, analysts at Oppenheimer give the merger an 80% chance of being approved—with conditions.
“Wireline, wireless and video markets are converging, which we expect the DOJ to consider, but with structural remedies that essentially enables a fourth competitor.”
Despite the analysts’ commentary, T-Mobile and Sprint believe they have more to offer with this merger than the last time they tried, including their 5G rollout and the job creation potential.
“We think the rise in the government interest in creating an attractive investment climate for 5G deployment improves the odds for the deal’s approval,” New Street Research analyst Blair Levin wrote in a recent note to clients.
The 5G and job creation arguments could factor into the FCC’s review as the agency is permitted to consider public interest merits along with competitive impact. However, their selling points won’t factor into the Justice Department’s antitrust review. Its study will solely focus on if the merger would lead to price increases or hurt competition in the industry.
Makan Delrahim, the Justice Department’s antitrust chief, has shown more aggression in terms of enforcement than officials of previous Republican administrations. He sued to stop AT&Ts planned purchase of Time Warner for example.
“The odds of approval are not great but neither are the costs of trying,” Levin said. “Meanwhile, the benefits are great. So we think it is worth the companies’ time and effort to try.”
3 Reasons why CRE companies should be watching.
Whatever the FCC and DOJ decide regarding the T-Mobile and Sprint merger, the ruling will impact more than just two carriers. Commercial real estate companies and building owners could be affected too when regulators decide if this merger is good or bad for the wireless industry.
Here are three reasons commercial real estate professionals should keep an eye on this story:
- Rental income: Building owners could see their rental income increase or decrease depending on the ruling. The opportunity to have a 5G network in a building could attract tenants who are willing to pay more for the higher quality coverage.
- Coverage changes: The ruling could also impact what kind of coverage building employees or tenants receive. If Sprint and T-Mobile succeed and can deploy their, “mother of all networks” and a building owner opts in to, anyone working or residing there will benefit from the better coverage. If regulators say no, and the carriers try continue to deploy 5G solo, there’s no guarantee it will be as good of a network as the one they would have created together.
- Fixed wireless Internet: With the emergence of fixed wireless Internet, where receivers are installed in a building and tenants gain web access through a cable that brings broadband signals inside, 5G deployment will definitely be sped up. When it is, building owners and tenants alike could see a change in their Internet costs.