July 30, 2019
As the dust settles around the novel arrangement among Sprint, T-Mobile and Dish Network, it's time to figure out what happens next, and how the new agreement might impact the rest of the market.
First, and most importantly, the proposed merger between Sprint and T-Mobile is not a done deal; it still faces a major legal challenge from roughly a dozen US states. The companies said they now expect their transaction to close sometime before Jan. 1, 2020.
However, despite the legal overhang, some Wall Street analysts believe the odds are improving that Sprint and T-Mobile will consummate their merger. For example, the Wall Street analysts at Nomura’s Instinet previously gave the merger a 25% chance of happening but raised that to 50% following Dish’s announcement. Meantime, the analysts at Raymond James raised their odds from 65% to 85%.
The big sticking point here is a lawsuit against the Sprint and T-Mobile merger filed by roughly a dozen state attorneys general, which argue the transaction will harm competition in the market by reducing the number of nationwide wireless providers from four to three. The states had initially filed their opposition to the merger in June, but they still appear to be against it in spite of the Department of Justice’s agreement with Dish.
"Dish has never shown any inclination or ability to build a nationwide mobile network on its own and has repeatedly broken assurances to the Federal Communications Commission about deployment of its spectrum," wrote California Attorney General Xavier Becerra in a release, adding that California along with New York, Colorado, Connecticut, the District of Columbia, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, Virginia and Wisconsin still oppose the merger. “T-Mobile and Sprint are asking Americans to trust that this new mega-corporation will act directly against its own economic interests by helping transform Dish into an independent competitor that rivals this new company."
That opposition likely comes as a disappointment to Justice Department antitrust chief Makan Delharim who, according to the Wall Street Journal, specifically worked to set up Dish as a fourth wireless provider to mollify the states' opposition. The publication reported that Delharim's office met with executives from Dish, Altice, Charter and Comcast to create a fourth nationwide wireless provider to replace Sprint. Dish was deemed the most viable candidate.
So will T-Mobile's deal with Dish withstand the legal battle? No one knows.
"Those who think the Dish deal will quickly settle the matter are likely to be disappointed," wrote the Wall Street analysts at New Street Research in a 9,000-word report to investors this morning outlining the pros and cons of the states' lawsuit against the Sprint and T-Mobile merger. "The trial status conference set for August 1, presents the most likely first opportunity for the parties to discuss the procedural and substantive implications of the Dish deal on the litigation and we will reassess in light of comments made at that time."
The California Public Utility Commission also has not signed off on the deal.
Winners and losers
Dish is both a winner and a loser. It's getting spectrum, customers and an MVNO deal with T-Mobile for $5 billion -- a price widely seen as a steal. For example, the analysts at New Street Research said that Dish now is in a position to create a business value of between $47 billion and $97 billion, "and even that may be conservative."
But the company is also a loser because many believe Dish faces an uphill climb -- to say the least -- in competing against the likes of AT&T and Verizon in 5G.
Most analysts agreed that T-Mobile is a big winner here. The company is not divesting any of the 2.5GHz spectrum licenses owned by Sprint, and has said that its expected $43 billion in deal synergies won't be impacted by its new transaction with Dish.
However: "The New T-Mobile -- if its merger is approved -- will need to keep on the pressure as a disruptor/fighter in the market even as it begins to rival the top two carriers in size," wrote Strategy Analytics analyst Susan Welsh de Grimaldo in a blog post.
Opinions on the effect of the deal on AT&T and Verizon are mixed. "Longer term, a new competitor is an incremental negative for AT&T and Verizon given Dish’s disruptive nature," wrote the Wall Street analysts at research firm Wells Fargo.
But the analysts at MoffettNathason wrote that AT&T is a clear beneficiary because the transaction will add more stability to the wireless industry. For Verizon, though, the MoffettNathanson analysts argued the deal is mixed because it adds stability but also eliminates a potential source of mid-band spectrum for the company.
The effect that the transaction will have on cable companies depends on what they do in the future, including whether they enter the 5G market directly. For example, the New Street analysts wrote that it’s a "modest positive" because the cable companies could buy wholesale access to Dish's network for their own mobile offerings.
And the analysts at MoffettNathanson wrote that the cable companies dodged a bullet because Dish did not ink a network-hosting deal with T-Mobile. Such a deal would have called for T-Mobile to hang antennas for Dish on its towers, thus building out Dish's 5G network much more quickly. "Had Dish been granted a hosting deal, they would have had enormous amounts of capacity, and they would have naturally pursued every conceivable avenue to use it. Inevitably, that would have included fixed wireless broadband," the MoffettNathanson analysts wrote, noting such a move would have put pressure on cable companies.
The agreement between Dish and T-Mobile essentially prevents a company like Comcast or Charter from purchasing Dish in an outright acquisition, at least for three years after the deal closes. However, the analysts at Cowen argued that this timeframe could still allow cable providers to position themselves to buy their way into the wireless business in the long term. "This three-year window provides more than enough time for Comcast to de-lever to pre-Sky debt levels (~2.3x) to take out the combined T-Mobile/Sprint. Meanwhile, if Charter isn’t taken out by Verizon following deal close, the cable operator could consolidate Altice … then acquire Dish, completing our thesis for the eventual and inevitable cable-wireless convergence," wrote the Wall Street research analysts at Cowen.
Separately, cable company Altice last week said it will no longer oppose the merger between Sprint and T-Mobile because its forthcoming mobile service will get access to the combined Sprint/T-Mobile 5G network. "In light of T-Mobile’s commitments to the FCC to provide Altice USA with access to the New T-Mobile network inclusive of 5G services, we believe that the major concerns regarding the merger's impact on our wireless business have been addressed," the operator wrote.
Most analysts also noted that tower companies like SBA Communications, Crown Castle and American Tower could benefit from the deal because it could create another customer for their so-called "vertical real estate."
And fiber providers like Zayo could benefit, according to the Wells Fargo analysts, because both the combined Sprint and T-Mobile and Dish will likely look to purchase fiber backhaul for their respective 5G efforts.
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