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Analysts skeptical as state challenge to Sprint/T-Mobile nears conclusion

As the long saga of regulatory and legal approvals for the T-Mobile US Inc.-Sprint Corp. deal approaches its possible conclusion, predictions for the outcome of the merger remain all over the map.

Closing arguments in a multistate lawsuit led by more than a dozen state attorneys general began Jan. 15 in New York. Leading up to the final arguments, Wall Street analysts and investors remained skeptical of the deal's approval, with Sprint's stock trading at a significant discount to the value of T-Mobile's proposed all-stock deal, while policy analysts in support and opposition of the deal are each optimistic their side will prevail.

"Both sides did well in distilling the facts in a way that indicates the judge could rule either way," wrote New Street Research Policy Advisor Blair Levin in a Jan. 12 note to investors.

Levin added, however, that he thought the states challenging the deal "have significantly greater legal precedent on their side." The states have argued the deal would harm innovation and lead to higher prices for consumers, as it would combine the third- and fourth-largest U.S. wireless carriers.

Jeffrey Kvaal, an analyst with Nomura's Instinet, said in a Jan. 7 research report that his firm is "as yet unconvinced by the rationales led by 5G leadership, job creation, consumer benefit, or DISH [Network Corp.] as a fourth competitor," which were among the benefits and concessions touted by T-Mobile about the deal.

Under the terms of the U.S. Department of Justice's approval from July 2019, T-Mobile and Sprint must divest Sprint's prepaid business — including the Boost Mobile, Virgin Mobile and Sprint prepaid brands — to DISH. Among other terms, the combined T-Mobile and Sprint must also provide DISH with "robust access" to the T-Mobile network for seven years as the satellite company builds out its own 5G wireless network.

The analysts are not alone in their doubts. Sprint's total return, which includes share price movement plus dividends, is down nearly 25% from April 27, 2018, the last full day of trading prior to the deal's announcement. As of midday on Jan. 15, Sprint shares were trading at $4.92, significantly below the $6.62-per-share value implied by the T-Mobile transaction, signaling Wall Street's trepidation around the merger.

Gigi Sohn, a distinguished fellow at the Georgetown Law Institute for Technology Law & Policy who previously worked for former Democratic Federal Communications Commission Chairman Tom Wheeler, said in an interview that she expects the judge to block the deal.

"I think the states have done a really good job of showing that a merger in this market from four to three will raise prices, hurt competition," she said in an interview. "And I don't think the companies did a particularly good job of sort of combating that," she added.

However, Tom Struble, technology policy manager at the R Street Institute, a free-market policy think tank, still believes the deal is likely to go through. He noted that Sprint, even with the financial backing of its parent company SoftBank Group Corp., does not have the resources to remain a robust competitor in the U.S. wireless market.

While some opponents of the deal have argued that Softbank is financially stable enough to bankroll Sprint to become more competitive, Struble said, "Softbank is not in nearly as strong of a financial position as they were a year ago."

For the quarter ending Sept. 30, 2019, SoftBank posted a $6.42 billion loss.

Sohn acknowledged Sprint's weaker position in the market versus its peers, but said this undercuts the companies' argument that DISH can enter the wireless market and become an effective competitor.

"DISH is starting out with far less, far fewer resources than Sprint," she said. "Sprint may be a weakened competitor, but DISH is ... even way behind it."

One question for both Sohn and Struble is what role the disclosure of certain text messages between Makan Delrahim, the Justice Department's top antitrust official, and DISH Chairman Charlie Ergen will play.

One text message reportedly showed Delrahim advising Ergen to have his "Senator friends" contact FCC Chairman Ajit Pai to bolster the deal's chances with the agency. Both the Justice Department and FCC have approved the deal.

"It wouldn't be unprecedented if the merger were to get blocked by the district court, but I do expect it to go through despite even some of the unflattering or unexpected text messages," Struble said in an interview.

Still, Struble acknowledged that the text messages "could undercut a bit of the authority, or the deference that the judge would otherwise give to the DOJ and the FCC's judgment here."

Regardless of how the judge rules, Kvaal wrote in his research report that T-Mobile shareholders will be winners in either scenario. Closure of the deal, he says, would enable T-Mobile to "realize significant synergies," while the deal's collapse would still remove the uncertainty that has "held T-Mobile in valuation limbo" for the past two years.

T-Mobile shares were trading at $80.29 as of midday on Jan. 15.

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