Will The Sprint T-Mobile Merger Pass Regulatory Muster?

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Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) finally announced plans for a long-awaited merger over the weekend. This marks the third time in the last four years the two rivals have attempted a combination, and the companies appear to have finally ironed out their differences, with T-Mobile parent Deutsche Telekom expected to own 42% of the merged company and Sprint’s parent SoftBank holding 27%. As we’ve mentioned before, a deal is likely to be significantly value-accretive for both companies, as they would be able to cut down on capital expenditures and operating expenses at a time when the wireless industry is transitioning to the next generation 5G services. Although there is a view that the regulatory environment for large mergers may have softened with the current government, a deal could still face considerable hurdles. Below we take a look at some of the regulatory challenges that the deal could face.

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The proposed merger between the two carriers in 2014 was dropped amid opposition from the Antitrust Division of the Justice Department and the FCC, which indicated that having four national wireless carriers was necessary to ensure competition and lower prices for consumers. While current FCC Chairman Ajit Pai appears to have moved away from this view, the stance of the current administration on telecom mergers has been somewhat unpredictable. For instance, the Justice Department sued AT&T last November to block its $85 billion take-over of media behemoth Time Warner. There is a possibility that the DoJ could remain averse to a deal this time around as well. Last year,  Reuters reported that  “career staff” at the Department of Justice, who carry out a bulk of the probe into a merger, would likely recommend that it be rejected as they believe that a merger could hurt customers.

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If the merger goes through, the combined entity would have over 90 million retail wireless subscribers, slightly behind rivals AT&T and Verizon, who hold around 93 million and 116 million retail subscribers, respectively. The increased market concentration would increase pricing power for wireless carriers. The impact could be felt the most in the prepaid space, which is typically favored by less affluent customers, with the combined entity likely holding over 50% market share for prepaid plans. Overall, the competition between T-Mobile, Sprint and the larger two carriers has been good for U.S. wireless consumers, fostering a lot of innovation while helping to keep pricing in check. Per data from the BLS for the month of March, the consumer price index (CPI) for wireless services was down by almost 13.5% over the last two years. This is driven in part by the contract-free plans and unlimited data offerings that the competition between T-Mobile and Sprint has helped popularize. This could give the deal an appearance of being anti-consumer, resulting in some regulatory hurdles.

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