T-Mobile/Sprint regulators stand ground, attorneys say
--> FCC still looks to DISH role in wireless
--> Questions remain on deal rationale
Softbank (TOKYO:9984) CEO Masayoshi Son’s campaign for winning over US telecom regulators still does not appear to be taking hold, several attorneys following the situation said.
Softbank has hired a bevy of new lobbyists, including former counsels to the House Judiciary Committee and Senate Judiciary Antitrust Committee, as part of an effort to presumably build support for a possible merger between Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS). It also launched an advertising campaign in Washington DC.
Both congressional panels would likely hold hearings on a proposed deal if a merger agreement is reached. Politicians would also probably weigh in on a deal with letters to regulators that could influence merger reviews and conditions.
Softbank, the majority owner of Sprint, has made no secret of its interest in acquiring T-Mobile, but has faced considerable preemptive regulatory opposition from the Federal Communications Commission (FCC) and the Department of Justice (DoJ). One former FCC official said staff at the regulators simply believe a deal is not a “good idea.”
Still, the companies are reportedly considering making a push towards a deal this summer. Last week, the Wall Street Journal reported that T-Mobile is seeking a USD 1bn break-up fee, in addition to maintaining the T-Mobile brand and some of the management team post-merger.
There are two immediate factors complicating a possible deal, said Geoffrey Manne, an attorney at the International Center for Law and Excellence. These are the upcoming spectrum auction in 2015 and the ever-presence of DISH Network (NASDAQ:DISH).
This news service has previously reported that, according to attorneys, the FCC would like to see DISH play a role as a nationwide wireless carrier. The Colorado-based satellite TV provider has acquired a large amount of wireless spectrum, but has not detailed its plans.
The FCC’s spectrum auction will be the last opportunity in the foreseeable future for wireless carriers to purchase spectrum in public auction.
According to analyst Craig Moffett of MoffettNathanson, T-Mobile needs to acquire at least 20MHz of low-band spectrum to ensure its continued competitiveness. The company currently has twice as much spectrum per subscriber as Verizon (NYSE:VZ) and AT&T (NYSE:T), but its current spectrum is in the more difficult to deploy and utilize mid-band range.
Moffett added that the company will likely have to go to the markets for a capital raise to acquire this higher quality spectrum.
The need to see this auction succeed may be forcing the FCC to take a stronger stance publicly than it wishes to adopt privately, however, said Manne.
“The FCC needs all of these companies to come in full-bore for the spectrum auction,” Manne said. “They might be saying that these companies will not be able to make big spectrum gains through private transactions in order to incentivize participation in the public auction. In that case, their position might relax afterwards.”
The auction is viewed as important due to the quality of spectrum and the proceeds will be used to fund the national first responder network FirstNet. The FCC is feeling pressure after the disappointing H block spectrum auction this year that saw DISH pick up all licenses for the minimum reserve price.
Until the auction takes place in 2015, attorneys said they did not believe the odds are very favorable for Sprint to successfully acquire T-Mobile.
“Son is used to having the odds against him, but he seems to think that if he just lays out the business case well enough he can convince the agencies,” said Anand Raut, former antitrust counsel for the House Judiciary Committee and policy counsel for public interest groups. “That’s not how this is going to work . . . Sprint and the regulators are largely just talking past each other.”
DISH’s role continues to be a focal point for regulators.
While the FCC is not supposed to consider alternative deals when conducting merger investigations, the regulator does tend to consider other options, Manne said. It remains to be seen, though, whether the FCC would “stagnate” the wireless industry while it waits to see what DISH does with its wireless spectrum, he added.
Ergen may be trying to affect the FCC’s thinking from the sidelines. In an analyst call on 8 May, he said that DISH could not engage in a bidding war with Sprint, but added that a renewed bid for T-Mobile would be “of strategic interest” to the company if the FCC and DoJ barred Sprint from making the acquisition.
The basic logic of a Sprint and T-Mobile deal is also not air-tight, said Raut. The logic has long been given as establishing a “strong third” player to compete with wireless industry leaders AT&T and Verizon.
“They say that this is about making a solid third competitor. But you can’t just add subscriber numbers together and say ‘this is how strong they’ll be’ because that doesn’t tell you anything about the future. You have to look at the infrastructure of the networks and whether their spectrum portfolios are actually complementary. It’s not at all clear that they are.”
Sprint operates a CDMA network for voice, while T-Mobile operates a GSM network, said Raut. Such combinations are not impossible, as T-Mobile proved when it purchased CDMA-based operator MetroPCS in 2013, but MetroPCS’ spectrum was in a complementary band that was contiguous with T-Mobile’s. Much of T-Mobile’s spectrum is not contiguous with Sprint, noted Raut.
Both service providers are moving to voice over LTE, which would mitigate issues around technology differences, but are not close to rolling the service out comprehensively, according to analysts. This would also fail to address the issue of the gaps in the combined spectrum portfolio.
In addition, Sprint has failed to modernize its network, said Moffett. “Sprint has a surfeit of spectrum, but it hasn’t done the work to build this out and make it a competitive network,” he said.
“If you look at Sprint’s prices, they aren’t commensurate with the level of service. It would take an enormous capital expenditure to bring that not only up to an acceptable level, but to a level that would differentiate it enough to justify those high prices,” Moffett said.
Moffett agreed that Sprint’s and T-Mobile’s networks are not compatible in terms of spectrum holdings or technology, adding that Sprint made a similar mistake when it bought Nextel in 2005.
Sprint’s valuation implies it either will acquire T-Mobile or deliver on Son’s goal of building the “world’s best network,” Moffett said, but the analyst said he does not believe this is plausible.
Softbank declined to comment. Sprint and T-Mobile were not immediately available for comment.