The announcement of the T-Mobile and Sprint merger is hands-down the biggest telecom news of 2018.
Yet, there are three regulatory agencies that hold a potential veto in this matter: the FCC, DoJ, and CFIUS. The standards each uses to evaluate deals are different, making it difficult for a merger to pass their scrutiny.
One Catalant expert, Cheenu Seshadri, Managing Partner at TMT consultancy Three Horizon Advisors, has performed a detailed assessment of the market concentration risk and possible outcomes of the regulatory agencies involved in the approval process. With his support, we’ve summarized the key takeaways; for the full analysis, you can read the original white paper.
At a high level, industrial logic for the merger is strong
While T-Mobile vastly outperformed the market, Sprint has taken a significant hit in the last five years. Both companies have made limited investments in augmenting network coverage and capacity, leading to weaker competitive position. The combined company could, however, bring a strong 5G offering to market, providing a viable alternative to Verizon and AT&T.
Ultimately, even with strong market logic, the merger needs to pass the idiosyncratic processes of the individual regulatory agencies:
Committee on Foreign Investment in the U.S. (CFIUS) risk is low
Because both companies are under foreign control, CFIUS will likely review the merger. Yet, both companies have previously been reviewed and neither are owned by entities in countries viewed as national security threats, so this is unlikely to result in a challenge.
Federal Communications Commission (FCC) risk is low-medium
A 2017 FCC assessment determined there was effective industry competition, and the entity’s top priority is to close the digital divide. To encourage deployment of advanced telecom capabilities, it is likely to support a transaction that could foster innovation and investment.
Department of Justice (DoJ) risk is medium-high
The biggest risk to the merger comes from the DoJ, whose use of the Herfindahl-Hirschman Index (HHI) to measure market concentration will likely raise a red flag for industry competition.
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The high fixed costs, scale-driven business model, and constantly evolving technology landscape all necessitate a high level of market concentration for mobile services. However, the increase in concentration as a result of this combination will likely result in either an outright challenge or onerous conditions to be imposed on the T-Mobile and Sprint merger. The stakes are high for consumers, wireless value chain participants, and the country’s global competitive position.
Ready to tackle up-and-coming challenges in your industry? Find an expert like Cheenu Seshadri, who can guide your business through evolutions in market landscape towards growth.