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COMCAST CORPORATION

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U.S. antitrust scrutiny tests T-Mobile's $26 billion bet on Sprint

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04/18/2019 | 05:18am EDT
FILE PHOTO: A smartphones with Sprint logo are seen in front of a screen projection of T-mobile logo, in this picture illustration

(Reuters) - T-Mobile US Inc's $26 billion (£19.95 billion) deal to buy Sprint Inc banked on changes in wireless technology and media streaming to win U.S. antitrust approval, but the bet now looks precarious.

Growing skepticism from the U.S. Department of Justice's antitrust staff over the impact of the merger on competition in the market will test the resolve of the companies to complete the deal that would see the top U.S. wireless carriers shrink to three from four.

While the Department of Justice has yet to reach a decision on whether to approve the deal, it is pushing Sprint and T-Mobile for evidence that the merger would be in the interest of U.S. consumers, people familiar with the matter said this week.

The deal would be the third major attempt in less than a decade to consolidate the U.S. wireless market, after AT&T Inc's $39 billion deal to buy T-Mobile in 2011 was blocked, and Sprint and T-Mobile abandoned a previous attempt to negotiate a merger in 2014 following regulatory opposition.

If completed, the deal would create a carrier with 127 million customers that will be a more formidable competitor to the No.1 and No.2 wireless players, Verizon Communications Inc and AT&T, respectively.

"It is time to acknowledge that the odds of the deal are less than a coin toss," said Craig Moffett, a senior analyst at Moffett Nathanson, in a note.

Sprint shares are down more than 6 percent after the Wall Street Journal reported the merger is unlikely to be approved as currently structured, despite T-Mobile CEO John Legere tweeting that the premise of the story was "simply untrue".

Sprint and T-Mobile are arguing that the U.S. wireless telecommunications industry has changed substantially since 2014, when they last attempted to merge.

The changes include the development of ultra-fast 5G networks, Sprint's struggles to operate on its own given its swelling debt load, and the marriage of telecommunications infrastructure with media production, as epitomized in AT&T's $85 billion acquisition of Time Warner Inc.

These changes, as well as the companies' belief that the current Department of Justice antitrust chief, Makan Delrahim, will take a more generous view of the deal than past leadership did, gave the two companies the confidence to take another shot at merging last year, they added.

Antitrust staff at the Department of Justice have taken a skeptical stance, however. They have been asking for more information about the extent of Sprint's challenges as a standalone company, the two companies' plans to merge their wireless network, and the benefits of the merger for the companies' planned 5G network buildout, the sources said.

T-Mobile has also been very efficient in cutting prices for consumers, and there are questions within the Department of Justice whether this would continue after a merger with Sprint, the sources added.

In a sign of the regulatory challenges facing the deal, T-Mobile and Sprint did not agree to any breakup fee should regulators scuttle the merger.

KEEPING UP WITH RIVALS

Sprint, which is majority owned by Japan's SoftBank Group Corp, has struggled to keep pace with rivals, haemorrhaging cash and losing subscribers despite price cuts designed to keep pace with T-Mobile, which has been steadily gaining market share from rivals. T-Mobile is majority owned by Germany's Deutsche Telekom AG.

At the same time, China has poured vast amounts of money into the development of 5G networks, prompting U.S. President Donald Trump's administration to prioritize the rollout of the technology in the United States.

Meanwhile, AT&T's Time Warner deal, and Comcast Corp and Charter Communications Inc, which developed wireless offerings to compete with T-Mobile and Sprint, increased some telecommunication companies' ability to bundle wireless plans with other offerings, including streaming video content.

That has increased pressure on T-Mobile and Sprint to increase investment in their own networks, which they can afford to do more if they gain scale through the merger.

T-Mobile acquired cable company Layer3 TV in 2017 and rolled out its own television service in 2018. That combination of content and wireless plans, the companies have argued to regulators, could position a combined company as a more serious competitor to companies such as AT&T that offer bundled services.

(Reporting by Carl O'Donnell and Liana B. Baker in New York; Editing by Muralikumar Anantharaman)

By Carl O'Donnell and Liana B. Baker

Stocks mentioned in the article
ChangeLast1st jan.
AT&T 0.25% 32.03 Delayed Quote.12.23%
CHARTER COMMUNICATIONS INC -0.64% 359.37 Delayed Quote.26.11%
COMCAST CORPORATION -0.33% 42.43 Delayed Quote.24.61%
DEUTSCHE TELEKOM AG 0.73% 14.888 Delayed Quote.0.46%
SOFTBANK GROUP CORP 0.09% 11545 End-of-day quote.64.81%
SPRINT CORP 2.31% 5.77 Delayed Quote.-0.86%
T-MOBILE US 1.78% 73.75 Delayed Quote.15.94%
VERIZON COMMUNICATIONS 0.45% 58.04 Delayed Quote.3.24%
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Financials ($)
Sales 2019 112 B
EBIT 2019 21 732 M
Net income 2019 12 538 M
Debt 2019 97 083 M
Yield 2019 1,97%
P/E ratio 2019 15,54
P/E ratio 2020 13,69
EV / Sales 2019 2,58x
EV / Sales 2020 2,38x
Capitalization 192 B
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Mean consensus OUTPERFORM
Number of Analysts 30
Average target price 45,3 $
Spread / Average Target 6,7%
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Managers
NameTitle
Brian L. Roberts Chairman, President & Chief Executive Officer
Michael J. Cavanagh Chief Financial Officer & Senior Executive VP
Kenneth J. Bacon Independent Director
Sheldon M. Bonovitz Director
Jeffrey A. Honickman Independent Director
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