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Sprint and T-Mobile merger is about to clear its biggest hurdle

Sprint and T-Mobile's on-again-off-again $26 billion merger appears to be on again, leaving the combined company poised to become the second-largest wireless provider in the country. The US Department of Justice is prepared to approve the deal within days, CNN Business has learned.

Sprint and T-Mobile’s on-again-off-again $26 billion merger appears to be on again, leaving the combined company poised to become the second-largest wireless provider in the country. The US Department of Justice is prepared to approve the deal within days, CNN Business has learned.

Pending all parties agree on concessions, the Justice Department will approve the deal by the end of this week or beginning of next week, according to a person familiar with the matter. The concessions would likely include the sale of Boost Mobile, Sprint’s discount, pay-as-you-go wireless service.

However, negotiations are still ongoing and the Department of Justice is prepared to litigate if the negotiations fall through, according to the source.

The Department of Justice declined comment for this article.

Facing off with regulators

The Justice Department’s blessing is a critical step forward for T-Mobile and Sprint as they seek to join forces against Verizon and AT&T, which owns CNN’s parent company, WarnerMedia.

The deal will not yet be final once the Justice Department approves it: It still awaits clearance by the Federal Communications Commission, and a group of state attorneys general.

Last week, New York and California’s state attorneys general filed a lawsuit seeking to block the proposed merger Tuesday, along with seven other states and the District of Columbia. They said the Sprint and T-Mobile merger would lead to “less competition and better returns for network operators,” according to the lawsuit. The states may have to agree to the companies’ concessions before they drop their suit.

Last month, FCC Chairman Ajit Pai recommended that the FCC bless the deal after Sprint and T-Mobile made some revisions to the structure of the planned merger.

To receive Pai’s blessing, the companies agreed to certain coverage commitments, including 100 megabit-per-second download speeds (equivalent to fast home broadband speeds) accessible to about 66% of Americans within three years of the deal’s closing. The companies pledged to build a 5G network within six years following the merger. That network will, they promised, also include coverage for some rural Americans, and they said the new company will offer an in-home broadband product.

Sprint also agreed to divest Boost Mobile, and that new company will promise to offer better prices than those currently offered by T-Mobile or Sprint for three years following the deal’s closing. The companies agreed to pay the FCC up to $2.4 billion in fines if they violate the agreement.

But the Justice Department’s support means the two companies have cleared a major hurdle in their bid for consolidation in an already concentrated industry. The agency often looks skeptically at deals in which direct competitors combine with one another.

Opponents have said the merger would lead to a reduction in competition and higher prices in the long run. The decision to approve the deal shows how federal regulators have become more willing to accept consolidation in the wireless industry, which is dominated by a handful of massive players.

Although it never made it a formal policy, the US government has repeatedly held that the country is better off when there are at least four national wireless carriers. In 2011, that logic drove the FCC and Justice Department’s opposition to AT&T’s proposed purchase of T-Mobile. The agencies were similarly critical when Sprint unsuccessfully sought to acquire T-Mobile in 2014.

Now, both regulators appear more open to changes in that approach. At the Department Of Justice, antitrust chief Makan Delrahim has argued that there is no “magical number” of competitors that guarantees a healthy market.

Normally the Justice Department and the FCC coordinate their merger announcements, according to the market research firm New Street Research, in a memo to investors last month. But in this case, it said, the FCC appeared to show its hand well before the Justice Department was ready. It is not clear why the FCC did so, but it could have been calculated to pressure Delrahim into approving the deal, New Street added.

“The FCC majority effectively approved a pending deal before the DOJ had made its decision, before a staff document analyzing the transaction was presented to the Commissioners, and before providing the public any knowledge of or opportunity to comment on the commitments relied upon to approve the deal,” the research note said.

Why Sprint and T-Mobile want to join forces

The American wireless market is ultra-saturated. Verizon and AT&T dominate the industry.

Following the spinoff of Boost Mobile, T-Mobile and Sprint may control as many as 127 million wireless customers, compared to AT&T’s 156 million and Verizon’s 118 million, according to the companies’ financial filings.

That’s why the two companies have tried for years to merge. Wireless technology is among the most capital-intensive industries, with annual costs of upkeep and expansion in the tens of billions of dollars. Verizon and AT&T have both launched 5G networks, and Sprint and T-Mobile lag behind. If they’re combined, the companies say, they’ll be able to pool resources to cut costs and build a 5G network for customers faster.

Sprint and T-Mobile have discussed a merger before. But they scrapped it in 2014 because of concerns about regulatory challenges from the Obama administration.

They began publicly talking about a merger again in 2017 only to announce that they had stopped talking about it later that year. But in April 2018, they announced their latest merger attempt.

What happens next?

The Justice Department’s decision to clear the Sprint and T-Mobile merger removes a lingering roadblock to approval by federal regulators. But the ongoing lawsuit to block the tie-up at the state level could complicate matters.

California, New York, Wisconsin and a handful of other states have alleged that the merger is anticompetitive because it eliminates a rival and could allow the remaining companies to raise prices in lockstep. T-Mobile has promised not to raise prices for at least three years after the close of the deal, but the states have said those and other pledges are not enough to limit the potential harm to competition.

The states involved are home to so many of T-Mobile and Sprint’s customers that the lawsuit poses a significant challenge to the companies’ plans, said Gene Kimmelman, a former Justice Department antitrust official who now leads Public Knowledge, a consumer advocacy organization that opposes the merger.

“If the states win the suit, I have to believe the deal falls apart,” he said. “The deal would be effectively dead.”

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