US Department of Justice (DoJ) staff were tipped to rule against approving any merger agreed by T-Mobile US and Sprint.
Sources told Reuters full time officials (who are not appointed by the governing administration) would prefer T-Mobile remains a disruptive force in the market with aggressive promotions.
In addition to removing a major competitor from the post paid smartphone space, Reuters noted a combined T-Mobile-Sprint would also hold more than 50 per cent of the prepaid market. Both of those factors will be taken into the DoJ officials’ assessment of whether a merger deal would hurt customers.
According to the Federal Communication Commission’s (FCC) 20th Mobile Wireless Competition Report, Verizon currently leads the competition with nearly 146 million mobile connections, AT&T is second with nearly 135 million, followed by T-Mobile (71.5 million) and Sprint (59.5 million). Together, T-Mobile and Sprint would have around 131 million, leading to concerns the closer proximity to Verizon and AT&T would reduce the combined company’s incentive to compete with aggressive price promotions.
The ultimate approval decision will be left to recently appointed DoJ antitrust chief Makan Delrahim and the Republican-dominated FCC.
In a research note, MoffettNathanson analysts said the Reuters report doesn’t mean a deal is impossible, but noted DoJ staff opposition doesn’t “help the odds”.
The company estimated there is an 80 per cent chance the operators will attempt a merger; a 40 per cent probability of deal being agreed; and a 50 per cent chance it would then secure regulatory approval.
With the odds so up in the air, MoffettNathanson warned investors should take into account the risks to the companies’ value if a deal falls through.
“Not only would the synergies of a deal be lost, but the warranted multiple of the companies would decline,” the analysts wrote.
“These risks are asymmetrically skewed to the downside in Sprint…We estimate that Sprint’s stock would fall to under $3 on a standalone basis without the expectation of M&A.”