June 12, 2019
The proposed merger between Sprint and T-Mobile may be hopelessly trapped between the Democrats' rock and the Republicans' hard place.
The politics swirling around this issue came to a head Tuesday when ten state attorneys general sued to block the transaction. "The US is split fairly equally with 24 Republican state AGs, 26 Democratic AGs and one independent AG; however the 10 state AGs filing suit against the merger are all publicly elected Democrats," wrote the Wall Street analysts at research firm Raymond James. "There are no Republican state AGs involved in the lawsuit, and 12 other states where PUC/PSC approval was required have already approved the deal and are not a party to the lawsuit."
This same political split is evident at the FCC, where the agency's three Republican commissioners have signed on to Chairman Ajit Pai's support of the merger, but the FCC's two Democrats have not. An FCC vote on the topic is scheduled for July 10.
Continued the Raymond James analysts in a note to investors: "This fits our thesis that the T-Mobile/Sprint merger is being viewed through more of a political lens in the seemingly never ending election cycle and the 10 state AGs are trying for a win either way: block the deal and they look good to their electoral base or lose the case and blame it all on the Republican administration after putting up a fight. Either way, it is a good fundraising strategy into an election year."
The Wall Street Journal editorial board seemed to agree, pointing to the fact that the Communication Workers of America union -- a staunch opponent of the merger -- quickly applauded the new lawsuit by the state AGs. "As ever, there's a union-Democratic Party merger here," the WSJ wrote in yesterday's edition. "The Communications Workers of America, who represent AT&T and Verizon workers, oppose the tie between the nonunion Sprint and T-Mobile. The last thing they want is a stronger nonunion competitor. The union is a big financier of Democrats, and it endorsed the AGs in coordinated fashion."
And Amy Klobuchar -- a senator from Minnesota and one of many Democratic candidates for President -- reiterated her opposition to the merger by praising the new lawsuit. "I am pleased that action is being taken by state attorneys general to block it," she said.
Klobuchar is also one of the Democrats who raised concerns that President Trump's White House is interfering with the Department of Justice's review of the proposed transaction.
To be clear, the management teams of Sprint and T-Mobile first pulled the political lever in their merger announcement more than a year ago by positioning the transaction as part of America's race to 5G and as a jobs creator. And T-Mobile CEO John Legere's penchant for Trump's hotels certainly solidified that strategy. But the growing noise around both 5G and the 2020 presidential election is certainly adding to the political weight dragging at the proposed transaction.
Now, here's the real question: Did Legere and the rest of Sprint and T-Mobile's executive teams make the right decision when they waded into the political mud? After all, on paper the proposed merger clearly crosses the Herfindahl-Hirschman Index (HHI) that the DoJ uses to assess market competitiveness. As the Wall Street analysts at MoffettNathason explained, the initial proposed Sprint/T-Mobile transaction registered an HHI score of 4,500, far above the DoJ's maximum of 2,500.
That calculation though doesn't account for the gobs of money required to build a wireless network, nor does it factor in the spectrum that is both necessary for wireless communications and is a very limited resource.
Still, though, the ten state AGs argue in their lawsuit that the merger would stifle competition. "The combined company would have a retail market share larger than the two largest MNOs today, Verizon and AT&T. In some areas, including in the New York City metropolitan area, the combined company’s share of subscribers would exceed 50%. The combined market share of Sprint and T-Mobile would result in an increase in market concentration that significantly exceeds the thresholds at which mergers are presumed to violate the antitrust laws," according to the lawsuit. "This increased market concentration will result in diminished competition, higher prices, and reduced quality and innovation."
Welcome to Crazy Town
One thing that just about everyone agrees on is the fact that we're heading into uncharted waters. State AGs typically do not act on a merger before a DoJ ruling, and the FCC typically does not rule on transactions without DoJ coordination. One Wall Street analyst called it "crazy town."
That said, some analysts still believe the nation's third- and fourth-largest wireless network operators will ultimately consummate their $26.5 billion transaction.
"Despite the states' surprise decision to jump ahead of DoJ, we continue to think DoJ approves the merger. [DoJ antitrust chief Makan] Delrahim's history suggests he gives great weight to the White House's views, and three weeks ago, the White House clearly signaled support for this merger," wrote the Wall Street analysts at Cowen in a note to investors.
But if the case goes to federal district court, as the ten state AGs wish, the Cowen analysts said they may succeed in blocking the merger -- unless the FCC and DoJ offer legal briefs that would push the court in favor of the transaction.
The Raymond James analysts agreed, writing that "we don't think the state AG lawsuit will be successful, or stop the deal from closing if it receives DoJ and California PUC approvals and T-Mobile/Sprint accept concession requirements."
But the Raymond James analysts also warned of more "political posturing while waiting."
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