Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: Sprint apparently abandons acquisition of T-Mobile, (Aug 7, 2014)

By John Curran,TRDaily

Sprint Corp., by all accounts other than its official one, has ended its efforts to acquire T-Mobile US, Inc.—an attempt that was considered by most analysts to have been doomed from the start by opposition from U.S. regulators who want to maintain the status quo of having four national wireless carriers compete with each other.

The apparent abandonment of a bid for T-Mobile US drew the quick endorsement of FCC Chairman Tom Wheeler. “Four national wireless providers is good for American consumers,” said Wheeler in a prepared statement. “Sprint now has an opportunity to focus their efforts on robust competition.”

An FCC official added, “The lobbying campaign turned out to be nothing but sound and fury, signifying nothing, persuading no one.”

A Sprint/T-Mobile combination faced an uphill climb in Washington from the start, and analysts generally gave it a slim chance of getting done as a result of that opposition.

Chairman Wheeler and Assistant Attorney General in charge of the Antitrust Division William J. Baer were cool on the merger because it would have resulted in the loss of one of the four nationwide wireless carriers—a reason the government successfully moved to block AT&T, Inc.’s attempt to buy T-Mobile in 2011. They seemed to reject the argument of SoftBank Corp.—Sprint’s majority owner—that a merger was necessary to allow the combined company to compete with Verizon Wireless and AT&T.

Wheeler told Sprint officials during a meeting in February that he was skeptical about a Sprint acquisition of T-Mobile, an agency official has said, while Baer said in a newspaper interview in January that the transaction would be greeted with skepticism by the Antitrust Division.

In April, Wheeler was asked by a reporter to respond to research that suggested Sprint and T-Mobile would not be able to survive on their own. The Chairman responded that the FCC favors “a competitive marketplace” but noted that various research can make the case for various actions. He also stressed the importance of having “four major competitors” in the U.S. wireless market.

Another blow to the deal may have come last week when the FCC circulated a draft notice of proposed rulemaking that would tentatively conclude that the Commission should bar joint auction bidding arrangements among national wireless providers. News reports had indicated that Sprint and T-Mobile planned to form a joint venture to bid in the FCC’s incentive auction.

In sifting through the aftermath of numerous reports that Sprint had abandoned its effort to buy T-Mobile, some Wall Street analysts said there remained a chance that such a deal could again be approached after the 2016 U.S. presidential election, while others said it was time for Sprint to redouble its efforts to compete more effectively in the U.S. market against T-Mobile US, AT&T, Inc., and Verizon Communications, Inc.

For its part, a Sprint spokesperson declined to officially confirm the news, saying that while a “a Sprint-T-Mobile transaction has been speculated on by the media . . . Sprint has never announced any transaction or possible transaction between the two companies.”

Masayoshi Son, chairman of Sprint and chief executive officer of SoftBank, got closer to the gist of the news without providing direct confirmation. “While we continue to believe industry consolidation will enhance competitiveness and benefit customers, our focus moving forward will be on making Sprint the most successful carrier,” he said.

And Sprint showed every sign that it was moving forward on the operating front by announcing it is replacing Dan Hesse, the company’s chief executive officer since 2007, with Marcelo Claure, the founder and CEO of wireless device distributor Brightstar Corp., in which SoftBank purchased a majority stake last year.

The company said Claure’s “first priority will be to continue the build out of Sprint’s network by leveraging its strong spectrum holdings as well as ensuring that Sprint always maintains truly competitive offers in the marketplace.” A Sprint spokesperson added that “Sprint’s focus, moving forward under Claure’s leadership, is to make Sprint the most successful wireless carrier in the U.S.”

In connection with his appointment as CEO, SoftBank is buying out Claure’s 37% stake in Brightstar for about $298 million. The company said that Hesse had “guided Sprint through a challenging period and has built a solid foundation for future growth.”

Wall Street analysts weighed Sprint’s longer-term attractiveness as a merger candidate in the context of its recent financial performance, which has lagged that of the other three U.S. national carriers.

Last week, Sprint reported 0.99% year-over-year revenue decline for the second quarter of 2014, to $8.78 billion, as the company lost customers during the quarter and its average monthly revenue per postpaid customer declined. The carrier’s operating profit however, jumped to $519 million, from a loss of $22 million in the year-ago period. Hesse tied the second quarter customer losses in part to the company’s network upgrade work, which he said “impacted the network experience,” but added that the network upgrade work was “largely” completed during the second quarter including upgrades to the company’s core 3G and voice network, expansion of 4G LTE service coverage to a population of 254 million people, and launch of HD voice service on a nationwide basis.

Analysts at Credit Suisse said they thought that Sprint could revisit a bid for T-Mobile US in 2017 when the White House will have a new occupant, and noted that a Republican administration may be more friendly to national carrier consolidation. They also and that “there are other potential suitors for T-Mobile” whose path could be cleared by Sprint’s apparent exit from the merger arena, including Dish Network Corp, cable service providers, or America Movil.

Analysts at New Street Securities said Sprint’s move to back away from T-Mobile US “is a step in the right direction,” adding that the company’s management “can now focus on turning Sprint’s business around,” something that would have been difficult to do in the midst of a long campaign for regulatory approvals to complete an acquisition. “The companies can revisit this deal in a year or two, when the regulatory environment should be more hospitable,” they said.

“Sprint as a company is better off, as having already wasted almost a year circling T-Mobile it avoids spending another 6-9 months on continuing a quixotic strategy,” said analysts at Bernstein Research, who added that Sprint may take the next two to three years to execute a business turnaround. They said that Deutsche Telekom AG, T-Mobile US’s parent company “still has several exit strategies,” among them pursuing a deal with Dish Network Corp.

Analysts at UBS Securities said today that Sprint’s profit margins could erode if the company cuts service rates to better compete with Verizon, AT&T, and T-Mobile US. They also said that T-Mobile US’s “subscriber momentum and growth trajectory will continue to be attractive to other operators,” and noted last week’s offer from French wireless service provider Iliad to buy a majority stake in T-Mobile for $15 billion.

The UBS analysts also noted the statement of Charlie Ergen, chairman of Dish Network, in May that he would be interested in a deal with T-Mobile US if Sprint were out of the picture. Ergen, according to reports, told analysts today that Sprint’s decision to back away from T-Mobile increases the company’s “optionality” to enter the wireless service business, although he stated no specific plan to seek out T-Mobile US as a partner.

Bernstein Research analysts said the that the FCC will benefit from not having to review another merger, by gaining certainty regarding the market structure for conducting the 600 megahertz spectrum auction, and “demonstrating that – despite the best efforts of its opponents – it can still be a relevant institution, able to resist high profile lobbying campaigns and ignore distractions such as auction promises and attempts to negotiate by press leak.” It added, “these factors likely strengthen the Commission’s resolve and ability to execute its agenda over the next 24 months.”

Paul Gallant, an analyst with Guggenheim Securities, said he thought that an end to the Sprint/T-Mobile saga would be a “mild plus” for the prospects for regulatory approval of the merger agreements between AT&T, Inc., and DirecTV, and Comcast Corp. and Time Warner Cable, Inc. “The FCC/DoJ’s preservation of a four-player wireless market provides some new political breathing room should they eventually decide to approve Comcast-TWC and AT&T-DirecTV,” he said.

Yesterday’s news drew praise from several other quarters.

“Today’s report that Softbank/Sprint is ending its bid for T-Mobile US is good news for consumers and U.S. workers,” the Communication Workers of America said. “The merger of these two competing companies would likely have meant more job loss since both companies have a track record of offshoring U.S. jobs. Had the merger gone forward, the two companies likely would have bragged about new synergies that would enable them to cut even more U.S. jobs. For U.S. wireless consumers, this deal would have reduced competition, innovation and choice.”

Craig Aaron, president of Free Press, said, “Sprint’s decision to drop its bid for T-Mobile is good news for mobile users. The deal could have stifled competition, squelched innovation and driven up prices. Give the FCC and DOJ credit for throwing cold water on this deal from the start. This should send a message to Comcast and AT&T, which are also lobbying Washington for approval of ill-advised mergers: Start paying more attention to the needs of your customers rather than scheming to swallow up the competition. Consumers win when mega-deals like this never materialize.”

“While Sprint and T-Mobile each face legitimate challenges in the coming years, a tie-up today between the 3rd and 4th nationwide carriers is in no way conducive to long-term marketplace competition in the U.S,” observed Daryl Zakov, assistant general counsel at the Rural Wireless Association.

“Since 2011, the FCC and DOJ have routinely, and very appropriately, signaled to the leadership of both companies that a potential merger is not in the public interest,” he continued. “The U.S. mobile industry is presently experiencing a lack of meaningful competition. It is not healthy. But this is one of those instances where the trumpeted cure of ‘consolidation’ would have been more harmful than the disease itself. Clearly, T-Mobile and now Sprint have finally recognized that their valuable time and financial resources are better spent expanding separate LTE networks in the United States that directly compete against the likes of AT&T and Verizon. To the extent Sprint and T-Mobile wish to roam or perhaps even partner with RWA members in rural markets, our door is always open.”

Sprint common stock was down $1.38 per share yesterday, to $5.90. It closed at $5.88 today. T-Mobile US shares were off $2.85 yesterday, to $31.06. They closed at $29.86 today.

News: AcquisitionsMergers Antitrust