The U.S. wireless industry’s future hinges on a trial. It starts Monday
The future of the U.S. wireless industry hinges on a court battle kicking off Monday, a case that could end with T-Mobile US Inc. buying Sprint Corp., and Dish Network Corp. getting the go-ahead to enter the market.
In federal court in Manhattan, Judge Victor Marrero will weigh arguments from a group of states that say he should block the $26.5-billion Sprint deal because eliminating competition between the two carriers would cause consumer prices to rise. T-Mobile says the opposite: By combining with Sprint, it could reduce costs and lower prices.
A win for the companies would create a new wireless giant that would overtake AT&T Inc. to become the No. 2 carrier in terms of monthly regular subscribers behind Verizon Communications Inc. A loss would leave Sprint a distant No. 4 in the market, weighed down by a debt load that threatens to cripple the company.
The states, led by New York Atty. Gen. Letitia James and California Atty. Gen. Xavier Becerra, have the edge going into the trial, said Blair Levin, an analyst at New Street Research. He said they have the better argument: that the tie-up violates antitrust laws and that the proposed settlement — setting up Dish to become a new wireless carrier — doesn’t resolve the anticompetitive problems.
That makes Dish Chairman Charlie Ergen the most important witness of the trial, Levin said. He’ll have to convince the judge that Dish can quickly become a robust competitor even though it has no experience selling wireless-phone service.
“If they fail on that, the fix fails,” Levin said.
That’s the view of the states. They argue there is no chance Dish can really replace Sprint as a competitor in the applicable time frame of two to three years.
Dish has agreed to buy Sprint’s Boost prepaid business, plus a number of cell towers and airwaves, to get a start on building a new “facilities-based” U.S. wireless carrier. The agreement includes a commitment to build an advanced 5G network that covers two-thirds of Americans within four years.
“The prospect that Dish may someday, many years in the future, establish itself as a fourth competitor that is vaguely comparable to the fourth competitor that already exists today is a wholly insufficient defense for an otherwise anticompetitive merger,” the states said in court papers.
Among the states’ witnesses at the trial will be Deutsche Telekom Chairman and Chief Executive Tim Hoettges. Deutsche Telekom is the majority owner of T-Mobile.
Investors are increasingly pessimistic about T-Mobile’s chances of defeating the states’ case. The spread between T-Mobile’s offer price for Sprint and the trading price, an indication of the deal’s risk, hit a high Thursday.
The states warn that if the carriers are able to merge, subscribers will lose the fierce competition between them that has meant lower prices and better mobile-phone plans. By combining, they will gain the power to charge higher prices to the tune of billions of dollars, the states said.
T-Mobile has tried to head off that argument. It has pledged to freeze prices for three years, offer free wireless broadband access to 10 million underserved students, and offer a new $15-a-month data plan capped at 2 gigabytes if the Sprint deal gets final approval.
But even without those commitments, T-Mobile argues that buying Sprint will give it a massive increase in network capacity, which means a cost advantage in terms of delivering data, and a way to compete with lower prices.
To help make the case to Marrero, who was nominated to the bench in 1999 by then-President Clinton, T-Mobile CEO John Legere will testify at the trial.
As they prepare for trial, Legere and his team have been negotiating with Sprint to renew their takeover agreement, after the original deal expired Nov. 1. Legere said last month that several issues are part of the discussion, including a lower price for Sprint, which has suffered a decline in performance since the transaction was announced in April 2018.
Analysts are more bullish about T-Mobile than AT&T, Verizon and Dish, giving it the highest consensus rating among the carriers, according to data compiled by Bloomberg. The average target price for the stock implies a 17% gain over 12 months.
A central piece of the argument the company plans to make at trial is that the combination of T-Mobile and Sprint’s networks will lead to faster deployment of 5G, the next generation of wireless technology. The company will also point to approvals of the deal by the Justice Department’s antitrust division and the Federal Communications Commission.
The Justice Department and FCC approvals make the trial unique. It is almost unheard of for state attorneys general to challenge a merger that federal antitrust officials have approved.
“If state attorneys general can kill a merger, that means there’s a new cop on the beat, which would have broad implications for how companies get deals approved,” said Walter Piecyk, an analyst with LightShed Partners.
McLaughlin and Moritz write for Bloomberg.
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