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Doubts Over T-Mobile Deal Grow -- WSJ

16/01/2020 8:02am

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By Drew FitzGerald 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 16, 2020).

Lawyers delivered their final arguments in the antitrust fight over the merger of T-Mobile US Inc. and Sprint Corp., as Wall Street grows more nervous about the wireless deal's fate.

U.S. District Judge Victor Marrero closed the trial in Manhattan by promising to try to render a decision "as soon as possible." He didn't offer a public timeline.

Shares of Sprint are trading at a more than 40% discount to the value of T-Mobile's proposed all-stock deal, which is now worth about $34 billion after steady gains in T-Mobile's market value. It is the widest gap since the merger of the two cellular providers was struck nearly two years ago.

The discount has doubled in recent months as the companies have tangled in court with a group of state antitrust officials led by California and New York, a sign of growing doubts about the deal.

"The market's getting more pessimistic," said Raymond James analyst Ric Prentiss. He said investors are waking up to the risk that "if this deal doesn't go through, Sprint's going to go down pretty hard."

The states argue that combining the country's third- and fourth-biggest cellphone carriers would hurt consumers. They have maintained their opposition to the deal despite a series of concessions that the Justice Department and the Federal Communications Commission wrested from both companies last year.

Officials from 13 states and the District of Columbia -- all Democrats -- took the case to trial in December, forcing several high-profile industry executives to testify about the transaction's merits.

T-Mobile boss John Legere returned to the courtroom on Wednesday to hear the closing arguments along with Sprint Chairman Marcelo Claure and CEO Michel Combes. New York Attorney General Letitia James and officials from several other states also attended the hearing, which stretched over four hours.

"I understand that the plaintiffs have brought out the big guns," Judge Marrero quipped at the start of the hearing, referring to Ms. James -- jokingly asking whether the defense was expecting the U.S. Attorney General in its own corner.

The Justice Department in a court filing last month defended the merger subject to certain conditions, but didn't join as a party in the antitrust trial. The litigation has exposed tensions between the Trump administration's top antitrust cops and their state-level counterparts.

Speaking Wednesday outside the courthouse before closing arguments began, New York's Ms. James said she was confident the coalition had proven its case.

Makan Delrahim, the head of the Justice Department's antitrust division, said he worries the merger market could suffer if the states prevail. Expert federal agencies found problems with the merger -- and fixed them, he said.

"I think if the states win, it creates major uncertainty in M&A," Mr. Delrahim said in an interview with the Journal, adding that he hopes the companies will appeal if they lose.

Either side could appeal Judge Marrero's decision. But the merger agreement has lapsed, allowing either Sprint or T-Mobile to walk away without paying a penalty. The diverging fortunes of the companies and current market realities could prompt the companies to renegotiate the terms if they extend the deal.

Asked if there might be a pattern of state attorneys general intervening in deals, Ms. James said she would work with counterparts across the country to uphold the law.

"I don't know if it's going to be a pattern. I just know that New York state attorney general and other attorneys general all across this nation will continue to stand up for the law," she said, adding that the group was operating within its sovereign powers.

Both sides' attorneys on Wednesday offered the judge competing arguments about the states' authority to challenge a consequential transaction that federal officials already reviewed.

"The states stand in the shoes of a private litigant here," T-Mobile attorney David Gelfand said. "They're not entitled to any special treatment."

Glenn Pomerantz, a lawyer for the states, said the states brought the case on behalf of their residents under established legal precedents. He said the state coalition wasn't convinced the Justice Department's solution would do enough to protect competition in the market for consumer cellphone plans.

"Your honor, let them compete," Mr. Pomerantz said.

Sprint shares ended Wednesday at $4.86. T-Mobile closed at $80.27. Japan's SoftBank Group Corp. owns more than 80% of Sprint's shares while Deutsche Telekom AG controls T-Mobile. Sprint's relatively small number of shares floated on the open market has deepened its latest stock swoon.

T-Mobile and Sprint have argued that joining forces would create a stronger and more efficient competitor to market leaders Verizon Communications Inc. and AT&T Inc. Many of the benefits stem from their complementary spectrum-license holdings, which would lower the combined company's costs for streaming music, videos and other data to its customers.

Wall Street analysts say T-Mobile stands to gain billions of dollars in market value if it clinches the merger, though it is also considered a relatively safe bet without Sprint. The company added more than one million cellphone subscribers in the fourth quarter, continuing a trend of customer gains at competitors' expense.

T-Mobile's merger partner faces a worse prognosis. Sprint hasn't yet reported the last quarter's results, but the company has struggled to hold on to its most lucrative customers. It has lost money in four of the past five fiscal years.

Sprint's Mr. Combes testified in December that his company offers "an inferior product" that puts it in a "vicious cycle" of customer losses and dwindling resources. But he and other executives stopped short of saying the company would disappear in the next two years.

The states challenged the companies' direst predictions during the trial, drawing parallels between T-Mobile's weak footing in 2011, after government opposition forced it to scuttle a planned tie-up with AT&T, and Sprint's current predicament. A recent court filing from the states took a glass-half-full view of its situation.

"With the right leadership and a commitment to innovation, Sprint can follow T-Mobile's precedent and strengthen its competitive position," the states wrote.

--Sarah Krouse and Brent Kendall contributed to this article.

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com

 

(END) Dow Jones Newswires

January 16, 2020 02:47 ET (07:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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