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The Deal: Sprint Faces D.C. Hurdles in T-Mobile Deal

Stocks in this article: T VZ S

WASHINGTON (TheStreet) -- Despite U.S. regulators' concerns that  AT&T  (T - Get Report) and  Verizon Communications  (VZ - Get Report) could unfairly dominate the telecom industry, the federal government is likely to block an attempt by  Sprint Nextel  (S)  to acquire  T-Mobile USA Inc., industry analysts predict.

The Wall Street Journal reported Friday that Sprint is considering a bid for T-Mobile. Several analysts said they believed Sprint leaked the story to test regulators' reception to a potential deal. The Department of Justice and the Federal Communications Commission both opposed AT&T's $39 billion plan to acquire T-Mobile in 2011. A Sprint takeover of T-Mobile, while potentially less anticompeitive than AT&T's, would have nonetheless raised serious concerns, analysts said Monday.

"Assuming it was Sprint that leaked the news, their intent seems to be a simple test of the waters," Craig Moffett, senior analyst at MoffettNathanson LLC wrote in a research report. "By piquing the discussion, they presumably hope to find out if a deal could or couldn't get done."

Christopher King and David Kaut of Stifel, Nicolaus & Co. predicted the reception in Washington "would be chilly, given recent pronouncements, particularly with major spectrum auctions on the horizon."

Noting that Sprint and T-Mobile are the No. 3 and No. 4 number carriers, respectively, in the U.S. wireless market after AT&T and Verizon, they said the DOJ's Antitrust Division is likely to challenge the deal in court.

That prediction is based in part on the DOJ's comments in a telecom industry proceeding at the FCC in which the agency said "the different arrays of choices" offered by each of four major carriers provides many dimensions of competition, including "coverage, network speed, network technologies, and price." As a result, the DOJ said it "believes it is essential to maintain vigilance against any lessening of the intensity of competitive market forces."

King and Kaut also noted that T-Mobile, flush with cash from the $3 billion breakup fee it got from AT&T two years ago, gained more market share than any other wireless carrier in 2013. T-Mobile's moves this year included acquiring MetroPCS Communications. "Thus, we believe it's possible [a] merger with Sprint may face an even steeper uphill climb in the DOJ's eyes than in April."

Added objections would likely come from the FCC. "New FCC Chairman Tom Wheeler has vowed to protect existing competition," they wrote.

Compounding the FCC's concerns are the upcoming auctions of wireless spectrum in 2014 and 2015. "The FCC is counting on wireless carriers to bid aggressively in 2014-2015 spectrum auctions to raise government revenue for the first-responder public-safety wireless network and deficit reduction. Any consolidation between the two would effectively eliminate a prime bidder for the spectrum, which would seemingly raise political concerns among officials worried about maximizing proceeds from the auctions," the analysts said.

Paul Gallant, an analyst at Guggenheim Securities LLC, agreed that the deal would face likely opposition from regulators. The likely defense from the companies that they would be able to "form a more effective counterweight to Verizon and AT&T ... is a solid argument" but not one ultimately likely to prevail. "Despite being a more palatable merger than AT&T/T-Mobile on pure antitrust grounds, we believe a Sprint/T-Mobile tie-up probably would face the same fate - a challenge by DOJ and the FCC. We believe regulators are very pleased with T-Mobile's resurgence and its aggressive, innovative moves and would not want to see it disappear via acquisition." --By Bill McConnell in Washington.

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