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Why Verizon should acquire Sprint (or at least try)


25/04/2011

Recently I was talking with a friend in the industry about AT&T’s (NYSE:T) proposed acquisition of T-Mobile USA (NYSE:DT). The conversation turned to whether this gargantuan deal would ever be approved, and my friend made this observation:

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“If Verizon really wanted to kill this deal, it would only have to say it was buying Sprint.”

Absolutely brilliant! (My friend didn’t want to be identified. He actually has to work with these people.) If the FCC and the Justice Department are leaning toward approving the merger of the AT&T and T-Mobile, a similar proposal from Verizon Wireless (NYSE:VZ, NYSE:VOD) and Sprint (NYSE:S) would stop them in their tracks. The government may be willing to winnow the competitive market down to the three nationwide operators, but it would take a gigantic political and philosophical leap to justify only two.

So far, Verizon has remained neutral in this debate (CP: Sprint’s Hesse weighs in on AT&T-T-Mobile deal). The conspiracy theorist in me might suspect Verizon’s silence is due to some sinister plan to spring a mega-acquisition deal of its own, but I really doubt that VZW is considering such behind-the-scenes machinations. Considering the loose regulatory environment, there’s an ever-so-slight chance that the FCC and DOJ might approve a Sprint acquisition, and dealing with Sprint’s cornucopia of wireless networks—along with the multi-billion-dollar investment—may be the last thing Verizon wants right now. But VZW CEO Dan Mead must have at least thought about it. A bigger, badder AT&T with loads of spectrum and much more robust mobile broadband network certainly doesn’t do Verizon any favors.

The lynchpin to AT&T’s argument is that a combined AT&T and T-Mobile won’t reduce competition; rather it puts the two operators in a position to compete more effectively. And AT&T’s key exhibit is none other than Sprint. Sprint not only would be a third Tier I operator to balance out the market, but, unlike T-Mobile, it runs a next-generation mobile broadband service, WiMAX, which is competitive with VZW’s current and AT&T’s future long-term evolution (LTE) networks. AT&T can argue that in the grand scheme things, taking T-Mobile out of the market would be a wash. It can’t really make that argument if Sprint were removed, also.

AT&T is also claiming that the mobile broadband space has seen increased competition lately as new entrants like Clearwire (NASDAQ: CLWR) and LightSquared enter the market, each loaded up with new spectrum. Well, a VZW-Sprint merger would cut those new entrants in half, given Sprint’s ownership stake in Clearwire. To make its application credible, Verizon might offer to divest Sprint’s Clearwire assets, but Sprint is Clearwire’s largest wholesale customer and investor. If Sprint were to cut and run, Clearwire might simply fail.

LightSquared’s future also is far from assured. It faces regulatory issues problems over possible interference from its LTE network with GPS receivers as well as the prospects of raising more capital (CP: The LightSquared Enigma). One of the rumors bouncing around is LightSquared will partner with Sprint to hang its LTE network off Sprint’s radio-agnostic cell sites, saving LightSquared a lot of cash while locking Sprint in as a major wholesale customer. If Verizon were to buy Sprint that deal would be dead. No matter which way you look at it, a Verizon-Sprint merger would inhibit the number of competitive players in the market.

So in this outlandish scenario, could regulators allow an AT&T-T-Mobile deal to pass, but deny a Verizon-Sprint tie-up? I suppose you could make the argument that a combined Verizon-Sprint would be more damaging to the competitive landscape than a combined AT&T-T-Mobile for the reasons laid out above as well as from a perspective of sheer scale. Merging the No. 1 and No. 3 operators certainly would produce a much bigger entity than merging the No. 2 and No. 4. But aren’t we just talking about degrees here? Once you have more than a 100 million customers, you’re talking numbers bigger than the populations of most countries. Approving one while denying the other would be political untenable. The FCC is an independent agency, but I doubt it could withstand the inevitable accusations of hypocrisy.

Since AT&T made its big announcement last month, Sprint has claimed that the merger would create a de facto duopoly, reducing Sprint and the regional operators to insignificance. Well if both AT&T and Verizon were allowed to acquire their smaller counterparts, we’d have an unquestionable duopoly, which neither AT&T, nor the FCC, could argue their way around.
Maybe Verizon and Sprint will call AT&T’s bluff.



 

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