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Sprint Corp. and T-Mobile US Inc. can walk away from their $26.5 billion deal if either foreign parent has to give up rights to appoint the combined company’s board members.
That’s one of several contingencies built into the April 29 merger inked by Deutsche Telekom AG, which owns T-Mobile, and SoftBank Group Corp., which owns Sprint. The agreement showcases what the parties see as the biggest trouble spots in closing the transaction — divestitures, national security conditions, and regulatory review.
The contract has a one-year expiration date with two possible three-month extensions if the parties need extra time to get the deal past regulators, either in the U.S. or abroad. That’s an ambitious schedule for a merger this size. Mega deals worth $10 billion or more are more than twice as likely to fail as midsize deals between $1 billion and $10 billion, according to Bloomberg Law’s M&A Market Update.
The proposed merger faces serious scrutiny from multiple U.S. government agencies. The Justice Department, the Federal Communications Commission, and the Committee on Foreign Investment in the United States (CFIUS) all will be reviewing the tie-up.
The DOJ may be the biggest hurdle from an antitrust perspective, according to Bloomberg Intelligence analysts. Its standard for evaluating mergers lies in whether the deal would concentrate the market, and a combined Sprint/T-Mobile would remove a major competitor from the wireless industry. The FCC, meanwhile, bases its analysis on a more flexible “public interest” standard that can be interpreted in many ways, the analysts said.
The agreement sets limits on what the parties are willing to give up to get the deal over the finish line. They can call it off if regulators demand so much that the deal doesn’t make sense anymore, which the agreement calls a “Regulatory Material Adverse Condition.”
Among the terms of that condition, the parties aren’t willing to give up more than $7 billion on a net present value basis. T-Mobile CEO John Legere said April 30 on Bloomberg Television that his company wouldn’t be willing to sell any of its licensed airwaves to seal the deal.
The agreement also speaks to the risk of limitations imposed by CFIUS. Deutsche Telekom and SoftBank would retain the right to appoint board members of the merged company, and they can opt to abandon their deal if CFIUS interferes with that right or demands other significant limitations on their other business interests outside of T-Mobile or Sprint.
Two Sprint subsidiaries do business with the Defense Department. The merger contract said the parties also won’t accept any mitigations sought by the Defense Security Service because of “foreign ownership, control, or influence” that materially affects network or business operations of the merged company. The DSS can’t stop the deal outright, but it can put conditions on government contracts to keep foreign companies from accessing classified government information.
If the deal is scuttled by regulators, T-Mobile will owe Sprint $600 million as a termination fee for its trouble. That’s just under 2.3 percent of the deal value, in line with breakup fees of similar-size deals.
U.S. antitrust regulators rejected a similar proposed deal between Sprint and T-Mobile in 2014. The companies now face the challenge of convincing regulators that markets have changed sufficiently since then to permit their merger.
It’s a new administration, but the staff at the Justice Department, mostly civil servants, are largely the same people who reviewed and rejected the merger in 2014.
Antitrust enforcers typically frown on reducing major competitive figures in a given market. This one would reduce the “Big Four” to the “Big Three.” T-Mobile and Sprint are the U.S.'s No. 3 and No. 4 wireless carriers, respectively, following Verizon Communications Inc. as the leader and AT&T Inc. in the No. 2 spot.
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