Is the T-Mobile US Merger with Sprint Still Likely?

Some observers think the odds of T-Mobile US and Sprint winning antitrust approval for their proposed merger at 50-50. Others think  merger approval is likely, at 70 percent chances of succeeding. Others believe antitrust approval is virtually certain, at about 90 percent chance of approval.

In early 2019 there appears to be less optimism. But some of us have argued that all talk about spurring 5G aside, the traditional numerical test of antitrust concern, the Herfindahl-Hirschman Index (HHI), suggests opposition based on market concentration will be a big concern.   

The Justice Department will generally investigate any merger of firms in a market where the Herfindahl-Hirschman Index (HHI), a test of market concentration, exceeds 1000 and will very likely challenge any merger if the HHI is greater than 1800.

The U.S. market has an HHI of about 2500.

Three years ago, the very same proposed transaction would have occurred where the U.S. market had an HHI score of about  2,766. But following a merger of Sprint and T-Mobile, the score would be 3,252.

The last time Sprint and T-Mobile US tried to merge, three years ago, Craig Moffett of MoffettNathanson calculated that the wireless industry currently had an HHI score of 2,766.

But following a merger of Sprint and T-Mobile, the score would be 3,252. That suggests an increase in concentration of about 486 points. So it did come as a surprise that regulators signaled opposition to the merger.

The firms say they will be better able to compete with AT&T and Verizon, if the merger is approved. That is undoubtedly true. They also say they will continue with price attacks. But no equity analysts I know of actually believe that will be the outcome. Instead, the analysts expect an easing of pricing pressure in the mobile market, if the merger is approved.

Some of us do not believe it will be easy for regulators to ignore the increase in market concentration, even if, as many correctly note, Sprint might be in too weak a position to compete effectively, absent a merger.

But some of us have believed for some decades that Sprint would not survive as a stand-alone company in any case. The issue is who the buyer might be. From a competitive standpoint, it can be argued that Sprint ownership by one of the two leading U.S. cable companies already in the mobile services market would make more sense.

Some might say the logic for owning Sprint applies even to a few of the hyperscale application providers, though present worries in some quarters about “bigness” might make that less likely, for the moment.

Strategically, there also is the likelihood that a mobile-only approach will now win in the U.S. market, over the long term, given the amount of competition in the market. One of the reasons T-Moible US now talks about fixed wireless is that this is a way to enter the fixed network market using its mobile assets.

And, to be sure, there are regional firms of many types that are fixed-only or mobile-only, including most mobile virtual network operators, local telcos and independent internet service providers. Still, long term, it appears an integrated strategy--based on both fixed and mobile assets--will be required.

If so, then the T-Mobile US merger with Sprint only is the first of two steps. A second combination of some sort will still be required to add the fixed network element.