In this weekend update, we explain, among other things, why the FCC order on TMUS/S may mean more for future deals than the one it approved, how the new New T-Mobile commitments may fit into their trial strategy, what to expect in terms of unexpected facts emerging at trial, and how the DOJ’s late inning Hail MaryForgive the mixed metaphor, but the effort does remind us of trying to win a baseball game by throwing a pass. See details below. to disqualify the states’ legal team is unlikely to succeed (but if it does it would have a big, though not entirely predictable, impact.) On the C-Band side, we review the different approaches of CBA, Eutelsat, AT&T, NAB and Senator Kennedy and how each highlights the different legal and political risks that alternative FCC policies would create. With just a week and a half to go before the likely publication of the proposed FCC order, there is still significant disagreement between the stakeholders as to how detailed the order should be as to the sales process and the transition, with AT&T continuing to support the CBA effort in terms of vision while criticizing the lack of details and laying a foundation for why the lack of details spells litigation trouble. Further, CBA still is staying silent on what it means by a significant voluntary contribution, while Eutelsat provides more details on its 50% ceiling (that members of Congress would see as a floor).
TMUS/S/DISH: Multiple Actions to Reshape the Litigation Stage
This past week saw a fury of news, including the FCC order approving the deal, the DOJ’s statement on the Tunney Act proceeding, T-Mobile’s new public interest commitments, DISH’s hiring up a wireless team, a curious and continuing discovery dispute, and a rather startling late inning Hail Mary by the DOJ to disqualify the states’ legal team. In addition, there was the no news on the renegotiation. Each should be seen in the context of the parties preparing for the litigation to commence next month. As discussed below, some tell us more than others, and a couple hold the prospect for incrementally moving the odds.
The FCC Order: a Future Roadmap to Deal Heaven? We put out a quick note on the FCC order shortly after its release (LINK), making four basic points: The FCC’s competition analysis is unlikely to help the companies much in court; the FCC’s finding that porting ratios should be utilized is likely to help states’ economic argument; DISH is back on the clock for its build-out commitment if the deal breaks; and the Democratic dissents, in addition to making substantive objections, pointed to Administrative Procedure Act (APA) problems, though those problems are unlikely to ultimately affect the resolution of the merger. Having had more time to digest the order, we still think those conclusions are accurate but would add a couple other observations.
First, as discussed below, the porting data discussion has to now be considered in light of new pricing commitments, as we discuss below in reviewing those commitments. Second, while DISH goes back on the clock if the deal does not go through, the FCC did not appear to make any statements to strengthen a claim against DISH in the event of litigation. Rather, we think there is language in the document that would help DISH in the event of litigation. We cannot know whether the FCC did so because the FCC because it has given up the thought of suing on the grounds that a narrowband IoT does not meet the build-out requirement or it simply was not thinking about that possibility in preparing this document.We think it is the latter, but that is speculation on our part that is consistent with other things the FCC has done, or not done, that suggest that while some at the Commission might wish to challenge DISH if the court blocks the TMUS/S deal, the institution is not taking steps to increase the odds of winning such a challenge. But we think the document, in terms of how it treats DISH and its build-out plans, is a positive for DISH, if that potential litigation scenario unfolds.
In addition, if one reads the order as an institutional document—that is, a precedent for the how the institution of the FCC would treat deals in the future regardless of who is President or which party controls the majority—it points the way to allowing nearly any deal. It does this in two ways. First, it emphasizes public interest benefits over competition analysis. This is actually an extraordinary change.As we noted at the time of Chairman Pai’s announced support for the deal, we found it odd that he pointed to deployment and pricing commitments as he had criticized a prior Chair for requiring such commitments to approve a deal. (LINK) Then again, in terms of interesting 180-degree turns in DC these days, we don’t think he would make the top 25 list. In any event, our point is not to judge the new reality but merely describe it and its implications. In the past, conservatives took the view that if a deal passed the competition test, no further analysis is needed as the public interest test was essentially no more, nor less than the competition test. Now, under the FCC analysis, the benefits to a social policy (rural deployment) and an industrial policy (5G leadership) are heralded as justifying approval. Second, while the FCC majority concludes that the deal does pass the competition test, it does so largely by simply accepting the companies’ views of the facts, particularly on the creation of capacity, as opposed to creating a model and demonstrating through a technical analysis of how it fits the model. This too is extraordinary, as antitrust generally views the harm of concentration not through the lens of whether it creates new capacity but through the lens of whether the concentration will lead to incentives to restrict supply. But that is not the lens the FCC choose to adopt here. In that light, we can’t think of any deal in which the merging parties would not be willing to offer public interest commitments to advanced favored causes and in which they could not make an argument that the merger would create greater capacity.We don’t think a merger of Verizon and AT&T would ever be allowed but just to illustrate our point, we believe that if the government were open to the deal, the two companies would make commitments related to deployment and pricing far faster, cheaper and better than made by the New T-Mobile. There is a long history in the sector, going back to 1913 and the Kingsbury Commitments, to agreeing to certain public obligations in exchange for government willingness to tolerate a certain level of market power, a tradition the current FCC appears to embrace. And we can’t help but note that China has just announced plans for developing 6G, creating a whole new opportunity for DC to justify and embrace the formerly “unthinkable.” Obviously, we don’t think a Democratic FCC would adopt this viewNot surprisingly Senators Warren and Sanders, among other Democrats, criticized the FCC order. For more on how Senator Warren would address mergers, see our recent note on her potential impact on antitrust and regulation for our sector. (LINK) but it does suggest that there would be a path in a second Trump term for the FCC at least to be open to deals that are currently considered as “unthinkable.”Commissioner O’Rielly went further than the others in suggesting a product market definition that, if adopted, would directly open the door to many more deals throughout the sector. He suggests, without citing evidence, “Even if you look solely at the myopic and out-of-date mobile broadband and telephony market used in this item, there isn’t much consideration given to the cable offerings, unlicensed systems, or satellite services, among others. To act as if these services are not substitutes for one another is turning a blind eye to reality.” Whether he or his opposites better reflect reality is worthy of debate but our simple point is defining the product market that way would certainly reignite the animal spirits of investment bankers in our sector. And as noted above, there is also 6G.
The DOJ’s Tunney Act Filing: The Roadmap for the Defense of the Fix. While the FCC order has limited value in previewing the upcoming trial, we think the DOJ response to the public comments on the proposed consent decree is a valuable roadmap to those interested in previewing the companies’ arguments at trial. First, it is more focused on the DISH fix, which unlike a lot of issues the FCC addresses in its order, will be central to the state litigation. Second, it more clearly adopts a traditional antitrust framework in making its arguments. Third, unlike the FCC order that glosses over various alleged harms, the DOJ directly addresses those harms. We don’t think it raises defenses to the fix that are new or change our views of the odds but we did think it did a good job of laying out why the deal could be approved We are not saying that the filing was good in all respects. We note in particular the DOJ’s response to a filing by Josh Wool, an investor. Mr. Wool provided a learned discourse on how the Clayton Act directs the government and the courts to employ a low-risk tolerance that may reduce competition. Instead of challenging Mr. Wool’s legal history or arguing that it has followed that history in this case, the DOJ simply asserts (at footnote 84) that Mr. Wool’s “argument disregards the principle that “[a] district court must accord due respect to the government's prediction as to the effect of proposed remedies, its perception of the market structure, and its view of the nature of the case.” Yes, due respect is appropriate, but we had understood the case law supporting the argument “because I said so” as a legal justification only applicable to cases involving national security and parents talking to two-year olds. by the judge overseeing the state litigation. Under the Tunney Act Review process, the judge can rule anytime, without a public hearing or any warning that he approves of the deal. As we have noted before, we anticipate the Tunney Act Review Judge will approve the consent decree but that decision is not binding on the trial judge in the state litigation. (LINK)
The New New T-Mobile Conditions: Setting Up a Third Path for the Trial Judge. Thursday, T-Mobile announced three new conditions—on public safety, the homework gap, and low-end pricing—that it would commit to if the court allows the deal to close. Our colleague, Vivek Stalam, published a note shortly thereafter (LINK) on its likely impact on the economics of the company. The note further opined that while it was a slight positive for the deal, it was unlikely to materially change the odds of settlement or the outcome of the trial. We agree and add one point in how the pricing commitment could be relevant in the trial. The states will have their economic experts demonstrate how, in their view, the merger is likely to raise rates. The companies will point to the commitments to argue that such price increases will never occur, and that by the time the commitments end, DISH will be a facilities-based competitor. One argument the states could then make would be that the commitments are not enforceable. The companies will then offer the Judge the opportunity to make the commitments enforceable through his decision. The companies could have made the commitments contingent on the states dropping the lawsuit. They did not. As a consequence, the states have already succeeded in obtaining public benefits beyond those obtained by the FCC and DOJ. That is, even if they lose the litigation, it was the state litigation that prompted the new commitments. We assume that T-Mobile decided to go ahead with the commitment because it wanted an option of using the pricing commitment at trial. Otherwise, as a matter of negotiating strategy, it would have made more sense to offer the deal as an inducement to drop the litigation. Of course, as Vivek’s note points out, the incremental cost of the new commitments is very low and is unlikely to affect valuations, so T-Mobile had essentially a free option to try to affect a settlement or the trial. Our point is it apparently choose to use it for purposes of improving its odds at trial. We think the other two commitments will not be relevant in anyway at trial. In other words, the companies are setting up a situation in which the Judge has options beyond the binary yes or no decision.We will await trial to see if the Judge is interested in essentially restructuring the deal and adopting an order that increases the number of behavioral and/or structural remedies. That raises all kinds of enforcement issues and issues about whether the Clayton Act favors clean market forces or tolerates price regulation as alternative to market structure for setting prices, but we will leave those issues to another day.
DISH Hires Up for Wireless, Strengthen Defense of Likely Prong. As discussed before, for the companies to win at trial, they will have to convince the judge that the DISH fix is “timely, likely, and sufficient.” (LINK) The states and interveners have signaled that they will challenge the companies on all three. On the “likely” issue, the more DISH demonstrates its financial and other commitments to deploying the network, the more likely they are to win on that prong. This week DISH took another step in that direction by hiring an experienced wireless team and discussing plans to raise $1 billion for that effort. We see that as a positive, though not dispositive, for the companies’ argument on this issue.
Discovery Issue Continues: What Information Did the States Receive? Previously we discussed a scheduled, then cancelled, conference call with the Magistrate. We had speculated that it related to a dispute over documents that the companies had not provided to the states. We now think we were wrong. Apparently, there was a dispute over documents that the states have but are from a confidential source that requires protection. The issue was apparently resolved with a small number of lawyers representing the companies getting the document. We don’t know what it involves but given that the trial will be about the likely behavior of the companies, and not the states, it is highly unusual for the states to have documents that are important for the trial; nearly all the discovery, outside of expert analysis, relates to documents in the possession of the companies. We would guess that the documents could have come from sources inside the companies, the DOJ or the FCC, but again, we are speculating.We freely admit that our speculation, which essentially involves a whistle-blower type situation, may be a result of the term whistle-blower these days being in the oxygen and the water of the DC environment we are residing in. In any event, we think the important point for investors is to ask what evidence at trial may emerge and change the direction of the trial? Given the process to date, it is unlikely that any evidence emerge that is favorable for the deal, beyond evidence of how DISH will provide competition. All the other favorable evidence is likely to have already emerged in the public FCC, DOJ and Congressional processes. If there is surprising or new evidence, it is likely to favor the states.
The DOJ’s Late Inning Hail Mary: Disqualify the States’ Counsel.Again, apologies for mixed metaphors. We have never seen any team win a baseball game with a pass, but then this deal has had so many things we have never seen before, that we really shouldn’t be astonished anymore by anything. Late Friday, a series of documents became public revealing that the DOJ had intervened in the state litigation for the purpose of disqualifying the states’ law firm on the grounds that the lead lawyer, Mr. Glenn Pomerantz, had been the outside counsel for the DOJ in the AT&T/T-Mobile deal review. We don’t think the argument—essentially that because Mr. Pomerantz knew how the DOJ analyzed competition he could ask for documentation from T-Mobile/Sprint that prejudices the DOJ’s interest in the companies winning the case—is likely to succeed.We have a number of reasons for finding the DOJ’s arguments rather weak. We don’t think it is worth investors’ time to repeat them here, but among other things, the late timing, the fact that the states were part of the same earlier proceeding so already had access to the information, and the fact that the companies in September agreed that they would not argue that Mr. Pomerantz or his firm was conflicted under the provision cited by the DOJ, among other things, suggests to us significant weaknesses in the DOJ’s claim. Perhaps of relevance is this is actually the second time in this proceeding that one side has tried to disqualify the team of the other. In March, we reported that T-Mobile made a filing to the FCC alleging “serious false statements in the submissions of DISH Network Corporation and three economists affiliated with the Brattle Group…In these submissions, DISH has presented an economic study that fabricates harms on low income consumers where none exist…The effect of these false statements are so significant to the positions promulgated by DISH and the Brattle Economists that their submissions should be excluded from the record and given no weight in this merger review.” (LINK). At that time we suggested the FCC would make an economic evaluation of the data but would not disqualify the Brattle Group or strike from the record DISH’s filings, which is what then happened. Disqualifying the team at the end of a process, instead of addressing the arguments, did not work then and we don’t think it will work here. While the pre-trial issues are all handled by Magistrate Judge Lehrburger, he no doubt consults with Judge Marrero, and we would guess the two of them will view it with the same skepticism that Judge Marrero viewed President Trump’s effort to prevent a third party from releasing tax documents.In short summary, the Judge found the President’s legal argument “repugnant to the nation’s governmental structure and constitutional values.” The question for investors is why did the DOJ make this filing? Is it evidence of its fear of losing and therefore evidence of the weakness of the companies’ arguments? Or is it simply a long-shot tactic that is unlikely to succeed but if it does, goes a long way to securing victory? We can’t know for sure but we think it does demonstrate a fear in the DOJ leadership that its arguments about the wisdom of the DISH fix may not be compelling to the trial court.We have no doubt that Mr. Delrahim, who began his tenure by losing the AT&T trial, fears a legacy of the bookends of his time being a courts rejecting his logic for both blocking and allowing a deal. But the joke around the antitrust bar involves the fact that in the effort to project his own post-government employment prospects, Mr. Delrahim is deploying a legal argument that, applied in the future would call into question whether any former government official could be employed in an antitrust review in which the government might be adverse. In this, to his DOJ staff, Mr. Delrahim resembles the Prince in Shrek who advocated a course of action in which “"Some of you may die, but it's a sacrifice I'm willing to make.” We also note that there are several former DOJ lawyers who also worked on the AT&T/T-Mobile deal who are now working for T-Mobile. Under the DOJ’s logic, those lawyers should not have been able to participate in the process as the DOJ was contemplating seeking to block the deal. We also think that the judge is the kind of judge who, while he would consider the DOJ bad form, will not let it affect his determination of the antitrust merits of the deal and the fix.Of course we could be wrong but investors should contemplate that if we are, and suddenly a bunch of lawyers are disqualified, the court might also have to delay the trial by many months, which we doubt is a good outcome for the companies.
Where is renegotiated deal? Finally, we had been anticipating the companies would announce a renegotiated deal. Mr. Legere explained why they hadn’t on an investor call, saying, “I'm not going to get into the actual terms. But the question is, okay, so November 1 came and went, and if we need a certain amount of time to lock each other into a date, what are the things that are important to each of us. And they can be value, they can be how do you handle things that have happened that need to possibly be indemnified, how do you agree on future things that you will share in order to settle the deal, et cetera. So, it's a broad array of things, very partnership-oriented. And as soon as we have light of day on that, I'm sure we'll put that out. And it shouldn't be too far out in the future, but it's a positive conversation and it could include any of the things that you're talking about.” For our perspective, we interpret that as meaning that there will be a new deal in place soon, addressing issues we have discussed (such as the Lifeline issue (LINK)) but we don’t see a material risk of the deal falling apart or a deal restructured in a way that changes the odds at trial.
C-Band: CBA, Eutelsat, AT&T, NAB and Senator Kennedy All Offer Different Paths Forward
With less than two weeks before the likely publication of the FCC order, stakeholders continue to offer different points of view as to how the FCC should proceed. While CBA’s basic proposal is likely to prevail, the details, as well as the subsequent litigation and legislative risk, remain cloudy.
CBA Offers Outline of Transition Plan But No Details on Proceeds Allocation While Eutelsat Offers Alternative and 50% of Proceeds Going to Treasury. With less than two weeks to go before the expected circulation of the item, CBA does not appear in a hurry to provide details of how they would sell the C-Band spectrum and how the proceeds would be distributed. It did offer a 20-page explanation of the transition but that document is significantly less detailed than various stakeholders have been calling for. As discussed before, this “four corners” strategy of sitting on a lead and running out the clock as certain advantages with the biggest one being a limited time for public comment, assuming a filing of the details just before the circulation. It also has certain disadvantages, including increasing litigation risk. Alternatively it could be the case that the CBA and the FCC leadership have quietly agreed that there is no need for the CBA to provide any further details, with the FCC instead relying on the broad principles document on the auction methodology and transition as the basis of its decision, delegating to CBA broad discretion to fill in the details as it wishes on both the sale and the transition. This reduces the risk of detailed criticism of the CBA just before the item is completed but increases the litigation risk, as other stakeholders may believe their interests are not sufficiently aligned with CBA to assure a process they regard as fair.
Meanwhile, Eutelsat has offered its own transition plan, with a not very veiled criticism of CBA’s approach, writing that it “is concerned that the current proposals in the record (i) do not sufficiently reflect the sort of fair, equitable, transparent, and competitively neutral outcome that would serve the public interest; and (ii) do not offer sufficient detail to demonstrate that they can be executed quickly and successfully with a minimum of operational risk. These concerns are brought into even sharper relief in the case of proposals in the record that rely heavily on private sector parties, often untested and under-resourced, to execute novel and unprecedented approaches on an accelerated timeline that leaves little room for error. “ In addition, Eutelsat provided the FCC with a formula for distributing the funds, specifically that “U.S. taxpayers should receive the benefit of depositing up to 50 percent of the auction proceeds in the U.S. Treasury. The remainder should be allocated among C-band satellite operators authorized by the Commission based on a formula that considers each operator’s CONUS revenues and stranded satellite capacity capable of serving CONUS, adjusted in each case for the remaining useful life of the included satellites.” As we suggested before, Eutelsat may be thinking that it is offering a ceiling for the amount to be returned to taxpayers but the nature of political negotiations suggests that members of Congress will regard it as a floor.
AT&T Presses Alternative Process, Opening Door to Third Scenario. AT&T continues its own strategy that combines high-level support for CBA’s plan while also offering criticisms of the details and providing an alternative path that it contends would limit litigation risk and be both fairer and more transparent to all stakeholders. In a seven page ex parte posted last week, AT&T noted it “remains concerned that many parties have made non-trivial legal arguments against the principal proposals on the record.” As one example, it wrote “without a detailed transition plan vetted by all stakeholders and approved by the Commission, it might prove difficult to demonstrate that modification of licenses held by satellite and earth station owners would allow them to provide essentially the same services after the transition and, as a result, would not result in a “fundamental change” to their authorizations.” It also suggested that “without notice and comment to adopt detailed Commission rules governing the auction and the transition, various stakeholders may bring notice or arbitrariness claims under the Administrative Procedure Act and otherwise reduce their support for, and participation in, the reallocation process.”
AT&T proposal creates a third option for the FCC: adopt a framework at the December meeting and then move forward with a short process on details that could be wrapped up in a few months. We don’t think this is the direction of the FCC but it may decide that such a path is ultimately less risky. As a matter of probabilities, AT&T is right that the failure to provide critical details increases the litigation risk for both substantive and procedural reasons. The FCC, however, may be concerned that such a delay increases the risk of political intervention from Congress which, once the House finishes its impeachment process, will start to focus on opportunities to show that it can do things other than impeachment.Chairman Pai’s Office may also be concerned that having premised a number of decisions on prioritizing speed, another 90 days of process may appear inconsistent with the preferred narrative of racing ahead on 5G and subject the Chairman to criticism about how long the process has already taken, such as this piece by his predecessor. In short, any steps forward from the FCC at this time have some risk, unless there is a genuine consensus being built at the FCC. We don’t see that happening.According to a number of religious traditions, the end of year brings miracles, so we hesitate to dismiss a 5-0 vote as impossible. We think such a vote would make it much more difficult for either Congress or the courts to overturn the decision. We just don’t see that kind of consensus building happening at the FCC at this time.
NAB Not Happy But Doesn’t Oppose CBA 300MHz Plan; Suggests Looking at 6GHz for More Mid-Band Spectrum. The head of the National Association of Broadcasters, Gordon Smith, met with Chairman Pai to express concern about proposals to reallocate more spectrum. He did not explicitly support or oppose the most recent CBA proposal, which as we noted last week, suggests a split in the industry as to that specific proposal. (LINK) Rather, Mr. Smith opposed proposals to free up the entire band, which we don’t believe the Commission leadership is seriously considering. But we thought it interesting that Mr. Smith sought to turn the attention of the Commission to a different band, arguing that if “the Commission finds it imperative to reallocate more mid-band spectrum for 5G, it need not confine itself to the C-band. For example, examining the potential to auction a portion of the 6 GHz band, rather than making the entire band available for unlicensed use, could potentially help make more mid-band spectrum available without sabotaging a critical component of the content ecosystem. “ The battle of 6GHz will likely be the next spectrum battle at the FCC, this one generally pitting unlicensed interests versus those who want more licensed spectrum.
Kennedy Gets His Time with Trump, Schedules New Hearing. Senator Kennedy has not retreated from his efforts to force the FCC to run the auction. He has scheduled a hearing on November 20th to discuss how the FCC could do so. That day is the day before the FCC is likely to make public its own proposal, so the answer that “everything is on the table” that has characterized official FCC congressional testimony is unlikely to be sufficient. We also note that Senator Kennedy has had the opportunity to spend more time with the President, campaigning together for the Republican candidate for Governor of Louisiana. Kennedy certainly ingratiated himself to the President and we expect that he further pushed for his C-Band agenda. Kennedy and the President remain a wild card in the process and we think will remain so even after the FCC votes the item in December.