States to file antitrust suit to block T-Mobile-Sprint deal

David McLaughlin and Erik Larson

A group of states are set to sue to block T-Mobile US Inc.’s proposed takeover of Sprint Corp. on antitrust grounds, putting pressure on the Justice Department as it nears a final decision on the merger of the two wireless carriers.

State attorneys general led by New York Attorney General Letitia James are preparing to file the lawsuit Tuesday in federal court in New York to stop a deal they say will harm competition and raise prices for consumers, according to people familiar with the case.

The states’ challenge is a major setback to T-Mobile’s and Sprint’s plan to combine and take on industry leaders AT&T Inc. and Verizon Communications Inc. Last month, the carriers cleared a key hurdle when they won support for their deal from the chairman of the Federal Communications Commission.

In this April 12, 2019 file photo, Federal Communications Commission Chairman Ajit Pai speaks during an event with President Donald Trump on the deployment of 5G technology in the United States, in the Roosevelt Room of the White House, in Washington. Pai said he plans to recommend the agency approve the $26.5 billion merger of wireless carriers T-Mobile and Sprint.

The states, all led by Democrats, are taking the rare step of suing to block the $26.5 billion deal while the Justice Department is still reviewing the merger. State enforcers have the authority to go to court to block a merger even if federal officials at the Justice Department and the FCC approve it. Sprint shares dropped 3.7% as of 10:12 a.m. in New York trading.

The case puts pressure on Makan Delrahim, the head of the Justice Department’s antitrust division. He can either side with the states, which say the merger should be blocked or negotiate a remedy that would allow the deal to proceed. Delrahim doesn’t think the settlement with the FCC goes far enough to resolve competition problems from the deal and is in talks with the companies about additional concessions.

The state attorneys general say that combining T-Mobile and Sprint would eliminate competition between them and lead to higher prices costing the two companies’ subscribers about $4.5 billion a year more, according to people familiar with the case. That estimate understates the true harm, they say, because it doesn’t include the higher prices AT&T and Verizon would be able to charge in a more consolidated market.

In the retail mobile wireless market, not including enterprise accounts, T-Mobile and Sprint would lead AT&T and Verizon in market share, according to the states. In some areas of the country, their market share would be more than 50%, they said. Harm from the tie-up will disproportionately fall on lower-income consumers who are customers of Sprint and T-Mobile’s pre-paid brands, Boost and Metro, they say.

According to people familiar with their thinking, state officials don’t know whether the Justice Department will ultimately approve the deal. They are taking action because after investigating the merger for about a year they determined it violated antitrust laws and didn’t see any reason to wait for the Justice Department to make a decision, the people said.

The states’ investigation, led by the chief of New York’s antitrust bureau, Beau Buffier, relied on technical and economic experts, according to one of the people. Their economists are Carl Shapiro of the University of California at Berkeley and Yale University’s Fiona Scott Morton, the person said.

The case comes more than a year after T-Mobile and Sprint announced the deal to combine, claiming that together they could better compete with Verizon and AT&T while speeding deployment of the next generation of wireless technology known as 5G. Although a previous attempt to merge was frustrated by Obama administration officials, T-Mobile and Sprint were betting on a more receptive audience from the Trump administration.

When the case is filed the tie-up’s fate will rest with a federal judge, who must decide whether it should be blocked on antitrust grounds. The companies could still reach a settlement before the case goes to trial.

If the carriers are stopped from completing the deal, they would be left to their own to compete in a maturing wireless market while financing expensive investments in developing their own 5G networks.

Sprint’s challenges are bigger. Despite becoming profitable last year after a decade of losses, it warned the FCC that without a deal it sees “no obvious path to solve key business challenges.”

T-Mobile Chief Executive Office John Legere took the lead on Capitol Hill – and on social media – advocating for the deal. He said the transaction would “supercharge” his company, which he made a maverick competitor in the market. The centerpiece of his case was that combining with Sprint would help the U.S. lead in 5G technology, a priority for the Trump administration.

That argument was dismissed by opponents of the deal, including consumer groups and the Communications Workers of America, which said the merger would reduce choice, lead to higher wireless bills and cause job losses.

Getting a deal with T-Mobile was a long-held plan of Masayoshi Son, the chairman of SoftBank Group Corp., which owns Sprint. In 2014, he came to Washington vowing a price war if he was able to acquire T-Mobile and personally lobbied U.S. officials about a potential tie-up. If the deal goes through, T-Mobile owner Deutsche Telekom will end up with a 42% ownership stake while SoftBank will own 27%.

With assistance from Scott Moritz.