Merger review process continues for Sprint, T-Mobile deal after facing 3 rounds of Congressional Hearings
On March 12, 2019, executives of T-Mobile US Inc. (“T-Mobile”) and Sprint Corporation (“Sprint”) testified in the third round of Congressional Hearings concerning the merger of the two companies. T-Mobile’s purchase of Sprint for $26 billion was announced almost a year ago on April 29, 2018 and continues to endure questioning from regulators. (Victoria Graham, Bloomberg). The Federal Communications Commission (“FCC”) and the Democratic-controlled House Subcommittee on Antitrust are reviewing the merger under the Communications Act of 1934 to ensure it promotes “the public interest, convenience, and necessity.” (47 U.S.C. §310(d); Chairman Frank Pallone, Jr., Committee on Energy and Commerce). While the U.S. Department of Justice’s (“DOJ”) antitrust division does not consider U.S. industrial policy in merger reviews like the House Subcommittee, it is looking at whether the deal harms competition. (Todd Shields et al., Bloomberg). As of March 27, 2019, the New York Attorney General’s Office is working with 17 other state attorneys general to review the transaction and may decide to challenge the deal even if federal regulators chose not to. (Tara Lachapelle, Bloomberg). This post provides a brief overview of: (1) the two companies pre-merger; (2) the competitive position of the potentially merged corporation; and (3) the status of regulators’ review of antitrust concerns before and after the congressional hearing.
T-Mobile is the third-largest communications network operator by market share in the United States. In the fourth quarter of 2018, T-Mobile added 2.4 million net customers, increasing the total for the year to 7 million additions. (Andy Meek, BGR). The company’s customer base equates to nearly 80 million, up from 46 million in 2013. Id. T-Mobile is the most popular carrier for customers with an annual household salary less than $75,000 per year. (Chairman Frank Pallone, Jr., Committee on Energy & Commerce). T-Mobile’s largest shareholder, German telecommunications company, Deutsche Telekom AG, controls 62 percent of the company. (Ezequiel Minaya, WSJ). Because of the foreign investment and control of the company, the merger requires T-Mobile’s clearance by national security officials. While the company is foreign owned, John Legere,T-Mobile’s chief executive officer (“CEO”), has been the face of the merger throughout the review process.
Sprint is the fourth-largest nationwide communications network by market share. In the third quarter of 2018, Sprint lost a net of 26,000 phone subscribers, reducing the company’s customer base from the 54.6 million at the start of the year. (Trefis Team, Forbes; Chairman Frank Pallone, Jr., Committee on Energy & Commerce). Like T-Mobile, Sprint’s largest shareholder is a foreign entity, SoftBank Group, a Japanese multinational holding conglomerate that owns 83 percent of the company. (Ezequiel Minaya, WSJ). Similarly, the merger requires review and clearance of Sprint by national security officials. Michael Combes the current CEO of Sprint and Marcelo Claure, the company’s current executive chairman and former CEO join John Legere as the merger’s emissaries, all active spokesmen of the merger in the media and throughout the review process.
Collectively the companies serve 130 million customers and directly employ over 80,000 people. (Chairman Frank Pallone, Jr., Energy & Commerce Newsroom). The merger, valued at $59 billion including debt, would consolidate the nation’s third- and fourth-largest networks into one company (“New T-Mobile”), which advocates say is necessary to compete against AT&T Inc. (“AT&T”) and Verizon Communications Inc. (“Verizon”), which collectively hold two-thirds of the cellular market in the United States. (Tara Lachapelle, Bloomberg; Marcelo Claure, House Committee on Energy & Commerce). The deal would combine T-Mobile’s investment capacity to maximize Sprint’s 2.4GHz spectrum holdings, enabling a comprehensive buildout of 5G broadband with the potential to cover more than half of the nation’s households by 2024. (Scott Moritz, Bloomberg; John Legere, House Committee on Energy & Commerce). The potential synergies the merger is expected to create are estimated at around $43 billion, providing what proponents argue will deliver scalable technology across the United States that will increase competition. (Kevin Ketcham et al.,Forbes; Marcelo Claure, House Committee on Energy & Commerce). Similarly, proponents argue that the merger does not hinder competition even though it reduces the number of competitors in the market noting that even after the merger, New T-Mobile would still be the third-largest U.S. communications network by market share in in the U.S. behind competitors AT&T and Verizon. However, the merger would combine Sprint and T-Mobile’s Metro, Boost and Virgin Mobile brands, meaning New T-Mobile would hold 42 percent of the U.S. prepaid market, reducing competition in that area.(Scott Moritz et al., Bloomberg).
The deal has received approval from 16 of the 19 state public utility commissions and the merger has been ratified by national security officials, a required phase of the review process due to the level of foreign investment and control of the companies. (Kori Hale, Forbes; Kevin Ketcham et al., Forbes; Trefis Team, Forbes). The FCC and DOJ remain the final hurdles to the deal’s completion on the federal level. The potential outcomes of the final stage are the agencies either close the investigation and let the deal move forward; enter into an agreement with the companies that includes provisions restoring competition; or file an injunction in federal court to attempt to stop the deal from closing. (Federal Trade Commission).
The March 12 hearing was the first meeting by the Communications and Technology Subcommittee to evaluate the consequences of any merger in eight years. (Chairman Frank Pallone, Jr., Energy & Commerce Newsroom). The key issues addressed in the hearing focused on the deal’s effect on consumer prices, low-income consumers, wholesale access, jobs, and 5G technology. (Chairman Frank Pallone, Jr. Committee on Energy & Commerce). Claure testified at the hearing that Sprint lacks the capital investment required to compete as a standalone company. (Marcelo Claure, House Committee on Energy & Commerce). Sprint CEO Combes echoed the sentiment in meetings with the FCC on March 14, arguing that even though Sprint had a better fourth quarter than predicted, the corporation will likely fail without the merger. (Todd Shields et al., Bloomberg). Antitrust officials will consider Sprint’s argument that the firm’s failure will result in the loss of a competitor, though it is unlikely that the argument is sufficient to override a challenge to the merger if the Justice Department makes the determination that the merger is anti-competitive. Id.
While state attorneys general often investigate mergers with the DOJ’s antitrust division, it is rare for states to challenge a deal when the federal government does not. (David McLaughlin et al., Bloomberg). It is also unusual for attorneys general to publicly voice concerns about a merger, as some have done here, and for 18 state offices to collaborate on an investigation. (David McLaughlin et al., Bloomberg). The concerns of the state attorneys general parallel the competition concerns raised in the March 12 Hearing, with heightened focus on the merger’s effect on low-income consumers. Id. To assist in the review, the state attorneys general group has hired economists that could act as expert witnesses if the states sue to block the deal on antitrust grounds. (David et al., Bloomberg). One noteworthy economist, University of California at Berkeley Professor Carl Shapiro, testified on behalf of the DOJ during the failed attempt to block the purchase of Time Warner Inc. by AT&T. (David McLaughlin et al., Bloomberg). The retention of Shapiro gives credibility to the concern that the state attorneys general will make a move to stop the merger even if the FCC and DOJ allow it to move forward, which is rare, though not unprecedented. Id.
In the weeks following the hearings, amid speculation that the coalition of state attorneys general are preparing to oppose the transaction, shares of all four major carriers sunk. This has lead regulators and critics to question if the deal would lead to higher prices and decrease competition. (Tara Lachapelle, Bloomberg). It is unclear whether federal regulators will give the greenlight to the deal or if the state group will bring suit to stop the merger’s progress. If federal regulators approve the transaction and the state group does not take action, the deal could close within the next month. That being said, there is still a level of unpredictability in the deal that has as many approvals as it does ongoing investigations, and it is too early to predict how regulators will come down at any level.