Is US Anti-Trust Making A Comeback?

Will the $26bn T-Mobile/Sprint deal actually happen? The decision will be made in the next few weeks. Back in August it looked like a sure thing. Now analysts give it a 50/50 chance of meeting anti-trust muster.

No one has a bigger stake in this flip of a coin than Softbank’s head, Masayoshi Son. He either walks away with a modest gain on his original $20bn investment in Sprint (S) in 2013 – or he faces losing it all plus somehow having to deal with a $39bn debt load if S ends up in bankruptcy. It would be a painful hit but wouldn’t break Softbank. But coming on the heels of the WeWork disaster the reputational hit will more difficult to recover from.

Unfortunately, the American consumer is likely to end up on the losing end of a head-I-win tails-you-lose toss.

S stock, now at $4.55, is the clear wildcard. Depending on whether the deal happens or not it has upside and downside of 20-25%. The other companies – Verizon (VZ), AT&T (T) and T-Mobile (TMUS) will probably benefit modestly in either scenario, with VZ and T possibly benefitting more in the no-deal scenario.

 

Softbank Moves in for the Kill

This drama started in 2013 when Softbank, looking to build on its success in the Japan telecom markets, acquired an 80% stake in S for about $22 bn. The goal was to strengthen S’s business, engineer a merger with TMUS, and become a major player in the US wireless market. S and TMUS started merger talks in 2014 but US authorities soon nixed the proposed deal on antitrust grounds.

Talks resumed in 2017 on expectations that the Trump administration would be more receptive to the combination but foundered when TMUS was unwilling to cede control to S. By then TMUS had clearly become the stronger company, with its wireless market share rising from 14% to 17% while S dropped four points to 12%. More to the point, TMUS stock had more than doubled and S was still stuck in a narrow range.

 

Chart 1: A Tale of Two Stocks

Source: Macro Hive

 

When talks resumed a year later Softbank capitulated. In June 2018 telecom T-Mobile (TMUS) agreed to acquire Sprint (S) for $26 bn, giving TMUS parent Deutsche Telecom and Softbank 42% and 27% ownership stakes, respectively, with the public holding the balance.

The deal is still undergoing regulatory review. If it is consummated, there will be three major wireless carriers, with Verizon and AT&T having shares near 35% and the new T-Mobile at 29%.

 

Getting Regulatory Approval

The debate has been over whether consumers will be best served by three major carriers that have the ability to invest in new national networks. Or if four carriers are needed to ensure competitive markets.

The FCC, focusing on the upside potential of three strong players, approved the deal, with the proviso that T-Mobile build out its 5G network nationally within the next few years.

The Justice Department also approved it but with conditions. It is seeking to maintain four major carriers by requiring S to sell its prepaid businesses (or about 20% of its subscribers) and some spectrum to Dish Network Corp (DISH) for $5bn. Dish in turn would be required to develop a national 5G network over the next few years.

The sticking point now is about 16 states who have sued to block the deal on the grounds that it would hurt rather than benefit consumers. Clearly those state attorneys general are skeptical of the Justice Department’s effort to turn DISH into a fourth national wireless carrier, as are many analysts. As noted, telecom analysts rate the outcome a toss up.

Either way the likely outcome will be that four wireless carriers fall to three. It’s a choice between three viable carriers or two dominant players (VZ and T) and a much smaller T-Mobile that will struggle maintain its position let alone improve it.

 

It Could be Chaotic if the Merger Doesn’t Happen

If the deal is scuttled, it will surely be a pyrrhic victory for the states and potentially chaos for the wireless industry. There is all but unanimous agreement that S cannot survive in its current form. Either it will have to find another buyer, sell itself off in parts, or end up in bankruptcy.

Softbank will have a major headache on its hands. In the worst case (bankruptcy) it will lose its $20bn investment. That should be manageable for a company with a $325 bn balance sheet but will leave a big hole nonetheless. And then there is S’s $39 bn of debt. The good news is that S’s debt is nonrecourse to Softbank; but it will have to carefully weigh the rational business decision against the vagaries of reputational risk and future access to debt markets.

DISH may also have a major problem. It has hoarded wireless spectrum for years in hopes of entering the telecom business but has yet to deploy it. The FCC has demanded that it start using spectrum by March 2020 or be at risk of losing its licenses. Unless the deadline is extended, that would both knock DISH out as a potential competitor and return that spectrum to the government, where VZ and T could well have the upper handwhen it goes up for auction.

It is difficult to see how this combination of industry concentration and chaos benefits for consumers.

 

And if the Deal Goes Through…

If the deal goes through, most of these problems go away. Softbank will exit S at breakeven or a modest gain. It remains to be seen whether regulators were right to expect that consumers will unambiguously benefit from three viable carriers and that S can become a fourth viable, albeit smaller, player. It’s difficult to be optimistic about either although in fairness most consumers will probably see little change.

Flip a coin. See what happens.

 

 

 

 

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)