T-Mobile (TMUS, Financial) CEO John Legere and Sprint (S, Financial) CEO Marcelo Claure met with the Federal Communications Commission (FCC) to seek approval for a proposed $26 billion merger. Company executives discussed with the FCC their plan to file an official application by the end of this month, stating their intended combination. Legere and Claure also had a formal meeting with the U.S. Department of Justice.
Getting the green signal
Typically, all mergers and acquisitions have to undergo a rigorous scanning process to determine whether it is in the interest of the public. While the FCC will assess if the merger proposal benefits the public, the U.S. Justice Department will look at the deal to see if it is harming competition. The regulators will have to understand the impact of the combination of the third and fourth largest U.S. carriers on consumers and competition.
Consumer groups and critics are skeptical about the deal as they fear it would lead to increased prices, crimp innovation, impact low-income consumers and reduce wireless options for the public by eliminating a fourth player.
As part of the deal, Sprint shareholders would receive $6.62 per share, and T-Mobile would control 42% of the board of the combined entity. T-Mobile has been taking big leaps in the past few years with its aggressive plans. In the first quarter, the Seattle-based mobile carrier continued expanding its subscriber base by attracting 617,000 postpaid phone subscribers. The addition is more than what AT&T (T, Financial) and Verizon (VZ, Financial), its larger competitors, recorded.
For the same period, Verizon added only 260,000 net retail postpaid customers, while AT&T lost 22,000 postpaid customers. Such remarkable increase will be taken into consideration by the regulatory bodies while determining T-Mobile’s acquisition proposal.
Joining forces with Sprint
T-Mobile and Sprint say that the combination shall help them to quicken the process of moving into the new generation 5G network, and give effective competition to the largest competitors Verizon and AT&T. However, whether the deal will be approved by the regulators, needs to be seen. Nearly four years back, Sprint and T-Mobile’s attempt to merge was disapproved by the US Department of Justice and the FCC saying that the arrangement would shrink the number of national mobile wireless carriers and harm competition. It was for the same set of reasons that the regulators turned down AT&T's proposal to acquire T-Mobile in 2011.
T-Mobile and Sprint’s proposal comes at a time when the U.S. wireless carriers are trying to attract customers with incentives, such as free access to Netflix (NFLX) and unlimited data usage plans to fight cutthroat competition. In fact, competition is getting so fierce that T-Mobile and Sprint require each other’s assistance in building the 5G wireless infrastructure. The two have said that their merger would position them stronger against AT&T and Verizon. Besides, the combined entity would be better positioned to offer better service at lower prices. However, some consumer groups and analysts have concern over the merger proposal and are urging the regulators to decline the merger. U.S. Sen. Edward Markey (D-Mass.) a member of the commerce committee, expressed his apprehension on the merger saying in a letter to the committee:
"The proposed T-Mobile and Sprint merger could present a number of harms to consumers and the marketplace, including higher prices and fewer innovative services…Without sufficient alternatives to the other two major wireless providers, consumers may be left with no option to switch to a provider offering better, more affordable services."
However, both T-Mobile and Sprint are confident that the authoritiesy will see the benefits consumers shall get in the event of the merger, and thus rule in favor of the combination. During the conference call, Legere said:
"We are making a strong suggestion to decision-makers that they not prejudge [the deal]…I see across the board a willingness to listen…We offer a real opportunity to bring real competitiveness [to this market,]…We could offer a quad play if that's what the market wants."
Even if the FCC gives approval to the deal, the U.S. Department of Justice would be a big hurdle as it would evaluate the deal from the perspective of violation of antitrust law.
Disclosure: I do not hold any position in the stocks mentioned in this article.
