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Ringing Regulatory Rumors: Deutsche Telekom Purportedly Agrees to Sell T-Mobile US

Reports circulated out of Japan and Germany late last week indicating Deutsche Telekom AG, owner of T-Mobile US Inc., reached a tentative agreement to sell T-Mobile to Softbank, owner of Sprint Corp.  The potential merger of the third and fourth largest wireless carriers has sent rumors of regulatory challenges flying.  Other news agencies, like Reuters, have said that crucial details including “price and financing remain to be worked out.”  None of the companies, however, have commented on the possible buyout.

Both Deutsche Telekom and Softbank have been frank about their desire to ink a deal.  Likewise, leading regulators at the Department of Justice (DOJ) have raised public concerns about the anticompetitive effects of the potential deal.  Earlier this year, William Baer, the assistant attorney general for the antitrust division at the DOJ, voiced his opinion that “consumers have benefitted from much more favorable competitive conditions” by having four major players in the wireless carrier industry.  As a result, he has expressed hesitation about the DOJ antitrust division’s ability to clear the long-rumored deal, which would create a narrower sector.

Sprint’s chairman, Masayoshi Son, has countered with a public campaign touting the benefits of the tie-up, including creating a more equal competitor to level the playing field with rival behemoths Verizon and AT&T.  Son has also encouraged regulators to more broadly consider access to internet, rather than the wireless industry alone.  Along those lines, he has made several proposals regarding mobile broadband and promised that with “a three heavy-weight fight” he would engage in “a more massive price war, a technology war.”

Still, industry commentators doubt the ability of the deal to clear regulatory hurdles.  Some have pointed to a lack of evidence from Son and Softbank showing that more effective price competition could flourish in a competitive environment with only three major players.  Such data is likely crucial to the fate of the tie-up, as a lack of similar data helped bring down AT&T’s prior proposed deal to purchase T-Mobile.  Additionally, the deal would require the Federal Communications Commission’s (FCC’s) approval alongside that of the DOJ.  Many cite FCC Chairman Tom Wheeler’s cable and wireless industry experience as indicating opposition to the deal.

Reports stated that Deutsche Telekom, which owns a 67 percent stake in T-Mobile, may be interested in keeping a small portion of its ownership interest—perhaps as much as 15 percent—in T-Mobile.  If Softbank moves forward, it may face challenges in a bid for T-Mobile, including cable giant Comcast.

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Call Waiting: DOJ to Maintain Scrutiny of Wireless Industry Consolidation

The wireless industry has seen steady consolidation since the late 1980s.  Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively.  Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.

T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.”  Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,”  As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.

Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011.  Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.”  In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses.  In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T.  The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition.  This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.

The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition.  The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”

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