DOJ Approves TMUS But with a Big But (That Affects SATS)

What’s New:  As expected, the DOJ has approved TMUS’ acquisition of USM.  But the approval had language that suggests that the DOJ may be more troubled than we anticipated with the prospect of SATS selling its spectrum to the Big Three wireless carriers.  In this note we analyze the DOJ language and what it means for SATS and the sector.

Background.  As we have anticipated, the TMUS/USM deal is heading for approval. (LINK)  While—again anticipated—TMUS had to make further concessions on its DEI program, we do not see those as problematic for the company in its future operations.

What is interesting, however, is what the DOJ said in approving the deal.  Among other things, it said:

• While it approved the deal, the “investigation nevertheless raised concerns about competition in the relevant markets for mobile wireless services and the availability of wireless spectrum needed to fuel competition and entry.”
• “With respect to the potential impact on consumers, for years, Americans have witnessed the too-familiar pattern of local or regional companies that discern and cater to their customers’ needs vanishing in favor of the ‘one size fits all’ approach of national brands.”
• “the Department considered how UScellular subscribers would fare if UScellular continued as a business without completing this transaction. That aspect of the investigation made clear that, due in part to its limited regional footprint and unique structural limitations, UScellular simply could not keep up with the escalating cost of capital investments in technology required to compete vigorously in the relevant market. This would, in turn, lead to the slow degradation of its network quality.”
• “In sum, the Department evaluated the likelihood of harm to competition and the potential effects of the transaction on consumers and determined that, on balance, the potential harm and offsetting benefits of the transaction do not warrant an enforcement action.
• “More broadly, the Department’s investigation made clear that we stand at a pivotal moment for the wireless industry. The transaction comes near the tail end of a decades-long trend toward consolidation-by-acquisition that has now left most consumers with meaningful choices among just the ‘Big 3’ national carriers. Economists and historians, appropriately, will debate whether this trend ultimately redounded to the benefit of competition and consumers, but the stark facts of today merit our immediate attention: together, the Big 3 account for more than 90 percent of the roughly 335 million mobile subscriptions in the United States.
• “As the Department observed in 2019, when T-Mobile acquired Sprint, ‘The merger would also leave the market vulnerable to increased coordination among the remaining three carriers. Increased coordination harms consumers through a combination of higher prices, reduced innovation, reduced quality, and fewer choices.’ The Department also noted at the time that ‘competition between Sprint and T-Mobile to sell wireless service wholesale to [mobile virtual network operators] has benefited consumers by facilitating innovation by some MVNOs.’  These concerns remain highly relevant.”
• “Spectrum, a national resource that belongs to the American people, is critical to competition in the relevant markets for mobile wireless services. This transaction, and two other deals contingent on its closing, will consolidate yet more spectrum in the Big 3’s oligopoly, which controls more than 80 percent of the mobile wireless spectrum in the country. The Department investigated these spectrum transfers and concluded that they would not result in sufficient harm to competition to warrant an enforcement action, yet the risks to future competition due to further spectrum aggregation by the Big 3 are acute. As revealed in the merging parties’ advocacy in defense of the proposed transaction, the increased revenues and profitability that the Big 3 obtain through transactions like these enable them to even more dramatically outbid independent rivals for spectrum at future auctions.
• The statement concluded with what we think is the most important comment for investors: “It is of concern to the United States that continued spectrum aggregation by the Big 3 threatens to impede the path for a fourth national player to emerge and challenge the entrenched incumbents with new and innovative offerings. Where future spectrum consolidation transactions threaten this path, the Antitrust Division stands ready to investigate and, if warranted by the facts and evidence, use its enforcement power to protect competition and American consumers.”

Analysis:  We think the key points for investors to understand are the following.

The DOJ and the FCC do not appear to be on the same page when it comes to competition in the wireless sector.[1]

• The DOJ says that it is concerned “that continued spectrum aggregation by the Big 3 threatens to impede the path for a fourth national player to emerge and challenge the entrenched incumbents with new and innovative offerings.”
• This is consistent with the way the DOJ evaluated the TMUS/S deal and we would assume some inside the DOJ want the DOJ to stay steadfast in advocating that position.
• By way of contrast, in his recent speech on his build agenda and in other places, FCC Chairman Carr said that American leadership in wireless requires more spectrum but did not express any concern about spectrum aggregation, nor has he expressed such concerns while Chair.
• In his letter in May to Charlie Ergen and in his subsequent comments on the public notices involving SATS, Carr has never mentioned concerns about spectrum aggregation or the potential impact on competition that SATS exiting the market would involve.[2]
• It is widely believed (and we agree) that Carr is hoping that the two public notices he started would cause financial stress to SATS so that it would have the impact of forcing SATS to end its efforts to become a fourth wireless network and sell its spectrum.
• In 2019, then Commissioner Carr voted to approve the TMUS/S deal without a condition that would help create a fourth competitor.  That is, his vote at that time expressed the view that three carriers would provide sufficient competition.

The DOJ does not appear to believe that local wireless companies are a viable solution.

• The DOJ specifically notes that a limited regional footprint is not sufficient to provide the kind of competition the DOJ believes would benefit consumers.

Based on this statement, the DOJ likely has concerns about FCC actions that would have the impact of forcing SATS to end its efforts to become a fourth wireless network and sell its spectrum.

• While the statement does not mention the FCC, it appears that both the long-term civil servants in the Anti-Trust Division and the new leadership have concerns about the way that the FCC is currently making it more difficult for SATS to succeed in building out a fourth network.
• We don’t believe the DOJ will weigh in in opposition to what we believe Carr wants to do in the two proceedings, but we think the DOJ may be a force within the Administration deliberations urging a settlement that allows SATS to proceed with its current plans without going into Chapter 11.

Based on this statement, the DOJ would have concerns about SATS selling its spectrum to the Big Three, but we don’t believe those concerns will result in the government acting to block such a sale.[3]

• We have been of the view that if Ergen decides SATS cannot succeed as a fourth network, the DOJ and FCC would allow SATS to sell its spectrum to the Big Three.
• We are still of that view. Though we acknowledge that the DOJ statement affects our thinking, at the end of the day, it will be difficult for the DOJ to block a spectrum sale under these circumstances.
• If Cable or some other entity (such as one of the Big Tech players) wanted to buy SATS’ assets, the apparent desire of the DOJ to prevent the Big Three from buying the assets could enable Cable or another buyer to obtain the assets at a lower sales price.  But we don’t think Cable is interested and a Big Tech buyer brings with it other antitrust concerns.
• Ultimately, if Ergen decides he must sell, we think the DOJ will have no choice but to accept that the only bidders will be the Big Three.
• Indeed, the DOJ not participating in the FCC proceedings suggests to us that while it wants to express its views on the danger of a concentrated market there is a limit to how much political capital it will devote to the issue.
• We could see the DOJ being more active in treating the spectrum aggregation as something resembling an essential facility and regulating MVNOs and other wholesale agreements to enable more innovative and competitive offerings but that is different than blocking a sale.
• Further, if we are wrong and the DOJ affirmatively acts to prevent a sale of spectrum to the highest bidder, we think the legal grounds for doing so will be problematic. 
• The DOJ has clear authority to block mergers but even there (unlike the FCC) there is an opportunity for judicial review, and courts have on numerous occasions rejected a government request to block a deal.
• Further, the DOJ’s own consent decree contemplates that after some period of time (in 2026) SATS efforts may fail and asset sales previously prohibited would be allowed.
• Thus, the grounds for blocking a spectrum sale are problematic, the part of the government with explicit authority over spectrum (the FCC) is likely to support the sale and the courts are likely to allow the sale.

Bottom Line: In terms of the short-term battle with Carr, we think the DOJ language gives SATS political capital on the Hill and with the White House.  In terms of the longer-term value of the assets for investors, the DOJ statement raises concerns about it allowing the financially optimal deal in terms of spectrum sales.  Still, we think the odds favor SATS ultimately being able to sell its spectrum to the highest bidder.

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[1] We note that the head of the Antitrust Division, Gail Slater, previously worked for JD Vance, a self-described Khanservative, a name conservative supporters of former FTC Chair Lina Khan gave to themselves to indicate support for her approach.  We think Slater is more aggressive on antitrust matters than Carr.

[2] Similarly, the two public notices that Carr had the bureaus publish were devoid of questions about the competitive impact of any FCC action pursuant to the notices.

[3] We could base our view on the fact that the DOJ notes that “readers should not draw overly broad conclusions regarding how the Department is likely in the future to analyze other collaborations or activities, or transactions involving particular firms. Enforcement decisions are made on a case-by-case basis, and the analysis and conclusions discussed in this statement do not bind the Department in any future enforcement actions.”  But as with all such boiler plate language, we understand why people write that but accept that it is our job to figure out in a precise way what matters and what does not.