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T-Mobile, Sprint Get Merger Backing From FCC Chairman

The Wall Street Journal. logoThe Wall Street Journal. 21/05/2019 Brent Kendall, Drew FitzGerald
© Reuters

Federal Communications Commission Chairman Ajit Pai said he would back the more than $26 billion (£20.5bn) combination of cellphone carriers T-Mobile US Inc. and Sprint Corp. after the companies agreed to a package of concessions.

The agreement ensures one key government approval for the merger but it gets the companies only halfway there. T-Mobile and Sprint, the third- and fourth-largest wireless providers in the U.S., need the blessing of both the FCC and Justice Department, where officials continue to be concerned that the deal would create an unacceptable reduction in competition, even after Monday’s concessions, according to a person familiar with the matter.

Mr. Pai said Monday that the commitments made by the two companies would substantially advance two of the FCC’s key objectives: “closing the digital divide in rural America and advancing United States leadership in 5G,” the next-generation wireless technology.

The endorsement marks a departure from the stance taken by past FCC leaders who stood in the way of deals that would leave the U.S. wireless market with fewer than four nationwide competitors. The commission joined the Justice Department in 2011 by opposing AT&T Inc.’s plan to buy T-Mobile, warning the merger would “significantly diminish competition.”

Mr. Pai’s FCC has taken a less rigid view of the wireless market. A staff report in 2017 found that the wireless business enjoyed “effective competition” as prices for mobile data kept falling.

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On Monday, the FCC said the companies agreed to invest in new wireless home broadband service, especially in rural areas, and to build new 5G infrastructure using Sprint’s licenses in the mid-band of the radio spectrum. The companies also agreed to sell Sprint’s Boost Mobile brand, a prepaid cellphone service with about seven million customers.

Sprint shares surged early Monday before paring their gains as doubts surfaced about the Justice Department’s decision, ending the session 19% higher at $7.34. T-Mobile shares rose 3.9% to $78.29.

The companies’ recent talks with the FCC yielded an agreement with Mr. Pai, a Republican who leads the five-member regulator.

It still could take weeks for the FCC to write a formal order that offers the companies conditional approval.

Marcelo Claure et al. sitting at a table © Jose Luis Magana/Associated Press An FCC agreement would be a notable boost for the companies, but it may not help them much at the Justice Department, which is considering whether the merger would harm competition.

Not all of Monday’s concessions were met with enthusiasm at the DOJ, though the proposed selloff of the Boost prepaid business is the type of structural deal change that the department has sought in other cases, a person familiar with the matter said.

T-Mobile representatives have suggested that the Justice Department’s objections have been at the staff level and not with top political appointees, whom the companies believe will come around to approving the deal. But top-level department officials, including antitrust chief Makan Delrahim, have been involved in the review and the department’s antitrust division is united with concerns, the person said.

The department told the companies in April that their deal, which didn’t offer any formal divestitures at the time, was unlikely to get a green light from the department as it was structured, The Wall Street Journal reported last month.

A Justice Department spokesman declined to comment.

The two agencies have different mandates under federal law. The FCC considers whether a telecom deal would serve the public interest, a broad inquiry that can take into account an array of policy factors, including the rural-service and digital-divide issues that Mr. Pai cited Monday among his reasons for supporting the merger with concessions.

The Justice Department has a much more specific focus: whether a proposed merger will harm competition. The department’s antitrust division looks at issues like whether a deal will lead to higher prices, reduced service or less innovation.

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In past deal reviews, the two standards usually complemented each other, and a split between the two agencies is rare.

Some of the commitments T-Mobile and Sprint made to the FCC may not be relevant to the Justice Department’s calculus. And Mr. Delrahim has said he doesn’t believe that so-called behavioral promises by companies on issues like pricing and product offerings are effective in protecting consumers when a merger threatens to remove a significant competitor from the marketplace.

The deal has also encountered opposition from some state attorneys general, who have been considering their own antitrust lawsuit even if the Justice Department doesn’t challenge the deal.

The companies are slated to hold more meetings with the Justice Department and state officials in the coming days, according to a person familiar with the matter.

The deal the companies offered the commission requires that they provide 5G service over mid-band frequencies that cover 75% of the U.S. population within three years, and charges the firms financial penalties if they fail to meet their targets. T-Mobile has said that Sprint’s ample mid-band spectrum assets were a key driver of their merger. Neither company would be required to shed spectrum licenses to win FCC approval.

The companies also agreed to an “infrastructure-based” agreement to provide the cellular network to support Altice USA Inc., which had opposed the transaction absent assurances it wouldn’t hurt the cable company’s fledgling wireless service.

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Company representatives spent months working to persuade both agencies to bless their deal but expected the FCC to take the lead in settlement talks, according to people familiar with the matter. They figured the commission has more leeway to approve the behavioral conditions that affect business operations than the Justice Department.

“The FCC’s done the heavy lifting for them in that regard,” T-Mobile counsel Rob McDowell said in a Monday interview with Fox Business Network.

Mr. Pai has also opposed past arrangements that allowed companies to merge as long as regulators police their conduct. As a commissioner, he attacked a deal that allowed Charter Communications to buy most of rival Time Warner Cable in 2016, saying in a dissenting statement that the agreement would be “micromanaging where, when, and how ISPs [internet service providers] deploy infrastructure.”

FCC officials said the latest wireless deal would be different because its provisions demand concrete steps to serve the public interest, like broader 5G coverage, or specific commitments to offset conditions that harm consumers, like concentration in the market for low-cost wireless service. 

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