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T-Mobile and Sprint Crawl Closer to Mega-Merger Finish Line

Jul 26, 2019
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The long running saga of the T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) tie up received a big boost today as the Department of Justice formally announced agreement on the proposed $26 billion merger. As I wrote about over a year ago (here), there seems to have been little to concern the DOJ in its due diligence process where it investigated whether or not the deal would be harmful to consumers given the effective reduction in the competitive landscape by reducing the top four wireless cell providers in the US to a top three.

Realistically however, the deal was unlikely to be problematic given that T-Mobile and Sprint combined would still be smaller than both Verizon (NYSE:VZ) which sits on about 35% market share or AT&T (NYSE:T) which has about 34%. The proposed merged group would come in at just under 30%. Those numbers have been broadly unchanged for years by the way so it’s not like this is a highly volatile environment with market share changing hands in a significant way on a regular basis.

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Dish Network (NASDAQ:DISH) also got in on the action today as the deal means that it will pay approximately $5 billion for a divested portfolio of assets including several prepaid cellular businesses from Sprint as well as access to Sprint’s wireless spectrum along with access to T-Mobile’s network for 7 years and a lot of Sprint’s cell sites. Additionally it has agreed to rollout a 5G network of its own which should cover 70% of the US population by 2023 so it’s clear that the US government is pushing for keeping 4 major players in the wireless space with Dish potentially facing substantial fines if it fails to follow through on the plan.

T-Mobile and Sprint - The Road to the Deal

This has been on the cards for a long time with the two groups courting each other for several years before formally pursuing a merger. The merger of equals is really about making future investment in the US cellular technology space worthwhile for the two parties while still being able to offer a competitive market for consumers which wouldn’t harm them due to the loss of a major competitor in the space.

This still isn’t a done deal yet though. The DOJ’s long investigation into the tie up was obviously the major blocker to the merger and the stock prices of both companies reflected that today with Sprint stock up over 7% and T-Mobile up almost 5.5%, however there is still a lawsuit working its way through the legal system where 13 states are attempting to block the deal on the grounds that it is anti-competitive and will cause detriment to the competitive landscape and ultimately consumer’s wallets.

New York and California are leading the legal action and appear concerned that Dish may not make a viable competitor given its lack of experience in the space compared to the major incumbents. The case was due to be heard in October but that may now be pushed back due to the new structure of the deal bringing Dish into play so the on again, off again merger story which has been running for about 5 years now is probably likely to run into 2020.

Does the Deal Make Sense?

It really does, at least for some of the players. When you look at the level of investment needed to sustain a cellular business, between spectrum costs and infrastructure rollout across regional markets, scale obviously matters in a business like this and that’s where regulators get involved to make sure that in industries which have such large costs that it’s only worthwhile for a few players to be involved, everyone is competing appropriately and no price-fixing is going on.

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5G rollout will cost a lot but a merged T-Mobile and Sprint will be able to save money on a shared rollout of 5G and beyond technologies so in that way the deal makes sense. Sprint is obviously the company which has struggled in recent times from a financial performance perspective and if the US doesn't want to lose one of its weaker providers, strengthening it by merging with another big player with a better financial position makes sense.

What makes less sense to me is the requirement for the divestiture of the pre-paid business and building up of Dish to become a major 4th supplier in the US. As I wrote in the original article over a year ago, there are numerous markets which have a small number of major players serving them and where the competition is savage and customers benefit from that intense competition. Boeing and Airbus are prime examples of this. The US market has had four big players for quite a long time and if the size of the market doesn’t really support a fiercely competitive landscape among those four with suitable profit margins to allow the smaller competitors like Sprint and T-Mobile to function long term as independent businesses, it feels like bringing Dish into the mix is kind of setting it up to fail.

The market liked the deal for Dish initially as well with the stock up 3.5% at one point but it pared back all of these gains as the day wore on to finish up less than 1%. It seems that its investors are also unsure what to make of the deal.

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