Late last month, it looked as though the merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) was in the bag. Then, the Department of Justice threw a wrench into the proceedings, which is terrible news for the owners of Sprint stock.
It Looked Like the Deal Would Go Through
T-Mobile CEO John Legere got a boost of confidence on May 20 when FCC Chairman Ajit Pai gave the thumbs up to the merger between the third- and fourth-largest wireless carriers in the U.S.
Although the FCC has asked for several concessions from the two companies, including the sale of Sprint’s Boost Mobile prepaid cell service, the $26 billion deal appeared to be nearing completion.
Not so fast.
There are many opponents to the deal who feel it will merely increase prices for American wireless customers. Included in the group opposed to the merger is FCC Commissioner Jessica Rosenworcel, who happens to be a Democrat, while the FCC Chairman is a Republican.
“We’ve seen this kind of consolidation in airlines and with drug companies,” Rosenworcel tweeted on May 20. “It hasn’t worked out well for consumers. But now the @FCC wants to bless the same kind of consolidation for wireless carriers. I have serious doubts.”
The DoJ Wants to Maintain the Status Quo
Bloomberg reported on May 29 that the DoJ was looking for a way to retain the status quo of four wireless carriers while allowing the merger between Sprint and T-Mobile to go through.
DOJ wants T-Mobile and Sprint to facilitate the creation of a fourth national carrier, using some of its network along with resources from external third parties such as Dish Network (NASDAQ:DISH), which has a significant amount of spectrum that it’s not currently using.
The problem with this solution is figuring out who would run this new fourth wireless carrier.
In addition, just because Sprint and T-Mobile have made all kinds of concessions to the FCC, including not raising prices or cutting jobs for the next three years, it’s highly likely that the combined company will do both those things once the three-year agreement runs out.
Over the long-term, this deal isn’t likely to be positive for American consumers, no matter what T-Mobile and Sprint are saying.
Why the News Is Bad for Sprint Stock
At the beginning of May, I recommended that owners of Sprint stock sell their shares because I thought there was no way the DoJ would approve the merger, even though the agency appeared to be on the fence at the time.
Now, with the FCC looking poised to approve the deal, the DoJ would prefer not to go against another department of the government. Therefore, it’s going to do everything in its power to reach a suitable compromise.
However, if T-Mobile and Sprint can’t figure out how to create a fourth carrier, the DoJ is likely to oppose the merger, creating a long, drawn-out legal battle.
In my article published on May 3, I said this about the Sprint-T-Mobile merger:
“In what world does it make sense to have three companies controlling a wireless market with 327 million people? Canada has a population of 37 million, about one-eighth of America’s, and yet it has three major providers, albeit ones that charge an arm and a leg for service,” I wrote.
“It is sheer lunacy to allow these companies to merge because if Canada is any indication, the results that the detractors warn about — fewer choices and higher prices — most certainly will materialize.”
At this point, I can’t tell you what’s going to happen to the deal.
What I do know is that T-Mobile’s stock won’t be the one plummeting if the DoJ blocks the deal. TMUS will still be in a strong third position.
Meanwhile, Sprint will have to find another partner with which to roll out 5G. That’s easier said than done.
$5 or lower could be right around the corner for Sprint stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.