Analysts Split on Who's Winning States v. T-Mobile/Sprint

The final witness testified Friday. "The court is adjourned until January 15, where each side will have two hours to present closing arguments," emailed a spokesperson for New York Attorney General Letitia James (D).

Strong testimony by Dish Network Chairman Charlie Ergen may not save the deal, said Anna Pavlik, United First Partners senior counsel-special situations. The testimony was “successful at showing why Dish would be highly motivated to do everything it can to enter as a fourth wireless player, [but] it still appears to be insufficient to demonstrate why replacing one struggling competitor (Sprint) with a complete novice who will face a host of its own challenges is a risk worth taking for consumers,” the investment adviser emailed Friday. “While the defense lawyers had told the story of prices potentially rising as T-Mobile approaches its capacity limits, this possibility still seems insufficient to overcome a strong presumption of illegality which underlies the AGs case.” In buying Sprint, T-Mobile would divest some assets to Dish.

“Carriers had the edge heading into court,” and still do, countered Hedgeye Potomac Research analyst Paul Glenchur. States raised many questions in trial, he emailed: “Is Sprint in irreversible decline? Can T-Mobile achieve capacity and cost efficiencies without acquiring Sprint? Is Charlie Ergen credible? But I don’t know that they’ve really guided the court to answers that make a compelling case.”

States maintain a “modest advantage,” emailed New Street Research’s Vivek Stalam. Judge Victor Marrero appeared “evenhanded” and didn’t reveal his thinking while asking witnesses about aspects not addressed in lawyers’ questioning, the analyst said. States must feel good about how their expert economist, Carl Shapiro from University of California, Berkeley, held up in cross-examination. Ergen and T-Mobile CEO John Legere also performed well and “came off as credible,” Stalam said.

Ergen “damaged the companies’ arguments about product market definition and harm, but did a good job describing how his deal would fix the problems,” said New Street’s Blair Levin in a Friday note. “Curiously, the states chose to try to damage his personal credibility rather than the credibility of the fix itself, potentially improving the odds of the companies winning on that issue.” UC Berkeley economist Michael Katz, carriers’ expert witness on Wednesday and Thursday, “tried, but in our view did not succeed, in engaging the judge to adopt his view of the product market definition, the potential for coordinated effects, and potential harms,” Levin wrote.

Optimism for carriers winning grew during trial, wrote LightShed Partners' Walter Piecyk and Joe Gallone. “State AGs have failed to make a compelling enough case that justifies a District Court Judge effectively overruling the decisions of two federal agencies. In fact, the more we learn about Dish’s deal via testimony and exhibits at this trial, the more we have grown concerned about increased wireless competition in the United States. To that end, we believe T-Mobile investors should be pressuring the board to improve the terms of its deal with Sprint.” Many investors thought the deal hinged on Ergen’s persuasiveness, and the Dish founder succeeded in deflecting states’ attacks on his credibility during cross-examination, said the analysts.

Deal efficiencies seem a stronger defense for carriers than Dish’s entry, Pavlik noted. “The parties gave themselves a fighting chance by describing why T-Mobile Uncarrier strategy may be running out of steam due to technical constraints. But the AGs countered by showing those constraints will not kick in for some time (meaning T-Mobile still has plenty of room to continue to improve capacity on its existing network), and with the availability of other spectrum and technology options it may ultimately find a way to upgrade its network to remain competitive. Sprint’s long-term success is somewhat less certain, but as the judge asked: if T-Mobile could turn their ship around in 2012, why not Sprint.”

Waiting until the new year for closing arguments “will probably not delay the decision, but the odds of a settlement, while still low, are probably increased by that gap and the closeness of the case,” Levin said. The LightShed analysts predicted an early February ruling.

"States face a high bar in their challenge," asserted DOJ and the FCC’s statement of interest (in Pacer) Friday. "They must convince this honorable court that it is not merely acceptable, but beneficial to the public, to deprive consumers nationwide of a higher quality T-Mobile network and DISH’s commitment to build a nationwide retail mobile wireless network, and to deprive consumers in rural states, which have disproportionately chosen to support the Antitrust Division’s settlement rather than join in this litigation, of new access to 5G networks.” Since DOJ and the FCC conditioned the deal to address possible harms, "the key question is whether any additional relief is necessary to protect competition and advance the public interest."