T-Mobile Pricing Seen as Obstacle for Any Sprint Merger

T-Mobile US Inc.’s pricing strategy is a potential roadblock for any Sprint Corp. takeover attempt because U.S. regulators want to preserve a maverick wireless company that offers subscribers lower rates.

T-Mobile is using cheaper plans to gain customers from larger rivals, helping create the kind of competition the Justice Department sought more than two years ago when it sued to keep the company from being gobbled up by AT&T Inc., the industry No. 2 behind Verizon Wireless.

Regulators won’t want to disrupt the market dynamic if Sprint reaches a deal to buy T-Mobile, said Jeff Silva, a Washington-based analyst with Medley Global Advisors.

A Sprint bid for T-Mobile “would hit a lot of static from federal regulators and antitrust officials,” Silva said in an interview. There isn’t “political appetite for seeing the national field reduced by one, especially if that one is a maverick carrier,” Silva said.

Since joining T-Mobile in 2012 from Global Crossing Ltd., Chief Executive Officer John Legere has undercut his competitors with lower-priced plans, quicker upgrade privileges and free international roaming. T-Mobile added 869,000 monthly subscribers last quarter; the company told investors it gains two subscribers for every one lost to AT&T.

AT&T, based in Dallas, has fought back with its own promotions. On Jan. 3, the carrier began offering T-Mobile customers as much as $450 in credits for devices and services for each line they switch.

‘Fat, Happy’

“These folks are fat, dumb and happy,” Legere, 55, said of competitors in a Bloomberg TV interview Jan. 8. “These guys don’t have the cost structure to compete or the speed to move. They’re going to have to wake up.”

Legere’s audacity -- he crashed AT&T’s party last week at the International CES in Las Vegas -- adds to the company’s reputation for shaking up competitors.

If Sprint combined with T-Mobile, “you’d have the slow mover taking out the fast mover -- why would they allow that?” said Roger Entner, an analyst with Recon Analytics based in Dedham, Massachusetts.

Despite having fewer customers than Verizon and AT&T, Sprint and T-Mobile have large swaths of airwaves, he said. Together, Sprint and T-Mobile would have “more than half the available spectrum and twice as much as AT&T or Verizon,” Entner said.

T-Mobile, which reported a third-quarter net loss of $36 million, has been the source of takeover speculation. Its parent company Deutsche Telekom AG has indicated that it would be willing to sell its stake.

Financing Discussions

Masayoshi Son, CEO of SoftBank Corp., the majority owner of Sprint, has held discussions with banks about financing a T-Mobile deal, people familiar with the matter have said.

John Taylor, a spokesman for Overland Park, Kansas-based Sprint, declined to comment about a possible deal for T-Mobile. Anne Marshall, a spokeswoman for Bellevue, Washington-based T-Mobile, didn’t respond to a request seeking comment.

A deal to combine Sprint and T-Mobile, the third- and fourth-largest carriers, would be reviewed by the Justice Department’s antitrust division and the Federal Communications Commission.

The Justice Department argued in challenging AT&T’s proposed $39 billion purchase of T-Mobile in August 2011 that reducing the mobile market from four to three national players would limit competition and lead to higher prices for consumers. The government also credited T-Mobile for keeping competitive pressure on rivals.

T-Mobile is a “self-described ‘challenger brand,’ that historically has been a value provider” and “places important competitive pressure on its three larger rivals,” antitrust officials said in a court filing.

Abandoned Bid

AT&T abandoned its bid less than four months after the Justice Department sued to block the deal.

“They not only feel vindicated by blocking that merger, but they now feel emboldened to hold the line,” said Medley Global Advisors’ Silva.

T-Mobile has since infused new competition into the wireless market, said Harold Feld, senior vice president at Public Knowledge, a Washington-based policy group. This month, the company announced an early-termination plan to pay the fees of customers switching from AT&T, Sprint or Verizon that could save families as much as $650 per line, it said.

Last year, Bill Baer, the head of the Justice Department’s antitrust division, said in an FCC filing the four biggest wireless carriers compete on price, network speed, and coverage. That means regulators need to “maintain vigilance against any lessening of the intensity of competitive forces,” he said.

“Today, T-Mobile remains a vigorous, independent force in the wireless industry,” Baer said in a September 2013 speech, according to his prepared remarks.

‘Reinvigorated Competition’

The Justice Department “drew a line in the sand and that’s what has reinvigorated competition in the wireless world and really turned everything around,” Feld said. “It would be very hard to go against that prevailing wisdom.”

Justin Cole, an FCC spokesman, and Gina Talamona, a spokeswoman for the Justice Department, declined to comment.

Sprint and T-Mobile could argue that combined they can create a more effective competitor to Verizon and AT&T, said Allen Grunes, a lawyer at GeyerGorey LLP in Washington who was formerly a Justice Department antitrust attorney. That argument only works if the companies show they can successfully integrate their technologies and pass on lower costs to consumers, he said.

‘Compete Directly’

Winning regulatory approval would also depend on how much the two compete directly with one another for customers rather than with AT&T and Verizon, Grunes said.

“If Sprint and T-Mobile are constantly fighting each other and consumers are getting some benefit because the two of them are targeting each other, then the merger becomes problematic from an antitrust standpoint,” he said.

T-Mobile’s aggressive tactics are unlikely to continue in the event of a Sprint deal, the American Antitrust Institute said in a Jan. 7 letter to the Justice Department and the FCC. It may be a weaker competitor if combining operations distracts the companies, leading to reduced service, it said.

“The national wireless market is experiencing a new and refreshing bout of vigorous price and service competition,” Albert Foer, the organization’s president, wrote. “If Sprint and T-Mobile merge, however, this dynamism may end prematurely.”