Cowen pegs the chances of the states winning at 60%
Shares of T-Mobile (TMUS) and Sprint (S) are lower on Monday after a Cowen analyst said he thinks states are likely to prevail in their case to block the proposed merger between the mobile carriers.
STATES MAY WIN IN TRIAL: Cowen macro analyst Paul Gallant told investors in a research note that after reading the pre-trial briefs from the state attorneys general, he believes the states are likely to prevail in their case to block the proposed merger between T-Mobile and Sprint. The trial begins on December 9, with a ruling likely in March. Gallant said he believes the odds of the states winning the trial is now at 60%.
In order to block the merger, Gallant noted that the government must make a case that the merger would harm competition. The wireless market concentration likely will create a presumption of harm that won't be easy for T-Mobile to overcome given court precedent and the Justice Department's own analysis of the merger, he said. According to the analyst, mobile virtual network operators, or MVNOs, "probably won't count," therefore meaning the wireless market is "highly concentrated" and states meet their burden of proof. The analyst added that he is unsure whether the states' price coordination argument will be persuasive, but they cite internal Deutsche Telekom (DTEGY) communications that may suggest Deutsche Telekom's view that the merger would enable higher prices.
An additional issue is that while T-Mobile has made several arguments that could potentially sway the judge to clear the deal, including potential large efficiencies from the merger, these efficiencies would occur beyond the typical 2-3 year timeframe, "which is a problem." Gallant added that T-Mobile's central defense is the large efficiencies from complementary spectrum holdings and lower overall costs will lead to lower prices. The analyst thinks the judge in the case will not accept T-Mobile's efficiencies defense, as courts rarely accept efficiencies as a successful defense once the government meets its initial burden.
The analyst noted that the Justice Department concluded that the result of the merger "would be increased prices and less attractive services offerings" and that any "efficiencies generated by the merger are unlikely to offset the likely anticompetitive effects on American consumers." He pointed out that the DOJ's negative conclusions about the merger itself conflict with T-Mobile's core argument to the court, which is that the merger, standing alone, is a net positive for consumers. While the DOJ said that the Dish (DISH) settlement will alleviate some of the harms, Gallant added that Dish "as a 4th competitor is barely discussed by either side's briefs."
WHAT'S NOTABLE: Texas and Nevada attorneys general announced recently that the states are no longer seeking to block the merger of Sprint and T-Mobile after reaching a resolution with the mobile companies. Colorado and Mississippi previously dropped their challenges. Currently, 13 states and the District of Columbia are still fighting the deal. The proposed $26B deal would shrink the number of major U.S. mobile carriers to three.
While the deal has been approved by the Justice Department and the Federal Communications Commission, it has faced continued pushback from states. New York and California announced earlier this year they were leading a group of attorneys general in a suit to block the deal.
'WE DO NOT KNOW' IF MERGER WILL HAPPEN: Bernstein analyst Peter Supino told investors in a research note of his own that "we do not know" whether the merger between T-Mobile and Sprint will happen. Instead, Supino proposed the alternative question of "Will T-Mobile remain a long-term winner in either case?," stating that he "thinks so."
Either way, Supino said T-Mobile's path will become clear within months. Without Sprint, the analyst said T-Mobile will continue to offer superior value in order to retain and gain subscribers while it shops for spectrum.
PRICE ACTION: In afternoon trading, shares of T-Mobile are down 1.3% to $77.52, while Sprint shares are down 4.7% to $5.64.