Regulators have a message for Sprint and T-Mobile: Don’t even think about it.
T-Mobile might be starting to feel like a teenager with an overprotective father. The nation’s fourth-largest cellular provider keeps flirting with other carriers, but the Obama administration keeps stepping in to break things up.
In 2011, the Justice Department and the Federal Communications Commission blocked AT&T’s $39 billion bid to buy T-Mobile, saying the deal would have stifled competition and led to higher prices. The rejection stung for AT&T; the company had to pay a $4 billion breakup fee to T-Mobile.
Now Sprint is the latest suitor to become enamored with T-Mobile, and the companies are reportedly discussing a possible merger. But in recent days, the Obama administration has been sending Sprint a clear message to back off.
“It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,” William Baer, the head of the Justice Department’s Antitrust Division, told The New York Times last week, referring to the four national wireless carriers. “Any proposed transaction would get a very hard look from the Antitrust Division.”
Regulators rarely comment on specific deals (especially hypothetical ones), but it’s not hard to read between the lines.
Not only would Sprint and T-Mobile have to persuade the Justice Department to bless their merger, but because the deal would involve the transfer of wireless airwave licenses, they would also need approval from the FCC.
FCC Chairman Tom Wheeler has indicated he would put any major wireless merger through the wringer.
“The mobile business is today with four carriers a competitive business,” he said during a public discussion in Ohio in December. “And it’s important it stay that way.”
Even assuming opposition from the Obama administration, Sprint (and its parent company SoftBank) could try for the deal anyway and hope to win in court.
Sprint would have a stronger legal defense than AT&T did. Verizon and AT&T are the industry’s largest firms, with Sprint and T-Mobile trailing far behind.
In a recent interview on Bloomberg Television, T-Mobile CEO John Legere argued that a merger with Sprint could help crack the industry’s “duopoly” and actually lead to more robust competition.
But Jeffrey Silva, a telecommunications industry analyst with Medley Global Advisors, said that trying to beat the government in court would be a “huge risk” for Sprint.
“The signals seem to be pretty clear at this point that the administration does not want this deal,” he said. “To just kind of hope that you can win in overtime with a federal judge, that’s a really risky high-stakes game to play.”
If Sprint tries to buy T-Mobile and fails, it would likely be on the line for a hefty breakup fee. A failed merger also ties up a company’s resources in legal fees and lobbyists and can mean delaying other important business decisions.
Sprint and T-Mobile declined to comment for this story.
The Justice Department has argued that T-Mobile is a “maverick” competitor, shaking up the wireless industry by introducing new features and pricing plans. Last month for example, the carrier announced that it will pay the early termination fees for people who switch from a competitor.
“Pushed by T-Mobile, the competition has responded,” the Justice Department’s Baer said in a speech last week in New York, noting that Sprint recently unveiled a new unlimited data plan and that AT&T has hit back by offering a $200 credit to T-Mobile customers who switch. When T-Mobile announced a plan last year to allow customers to upgrade phones twice a year, the other carriers all responded with their own plans to allow more frequent upgrades.
“Competition today is driving enormous benefits in the direction of the American consumer,” Baer said.
But Silva said the executives at Sprint and T-Mobile may be wondering how long they can compete with Verizon and AT&T.
“Both are trailing in 4G LTE build-out, and if you look at market share and subscribers, there’s quite a bit of distance between themselves and AT&T and Verizon,” he said.
Even with dim regulatory prospects, buying T-Mobile might be Sprint’s last best chance to get on equal footing with the two industry giants, Silva said.
The Justice Department, however, has a different plan for boosting the two smaller carriers.
The FCC plans to auction off the rights to large chunks of the airwaves in 2015. With the demand for streaming videos, downloading apps, and browsing the Web skyrocketing, all the carriers are looking to get access to more frequencies to carry their customers’ traffic.
AT&T and Verizon currently control most of the prime low-band frequencies, which can carry signals over greater distances. So the Justice Department wrote a memo to the FCC last year, recommending that the agency use caps or limits to hamstring the big players, ensuring that Sprint and T-Mobile can come away from the auction in strengthened positions.
It remains to be seen whether the promise of additional airwaves and the threat of regulatory action will be enough for Sprint to resist the allure of T-Mobile.
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