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T-Mobile, Sprint Stocks Drop After $26.5 Billion Merger Announcement

Shares of T-Mobile and Sprint fell Monday in the wake of announcing their planned mega-merger — which faces potential regulatory roadblocks.

Sprint’s stock was down as much as 14% and T-Mobile slipped more than 2% ahead of the stock market’s open Monday. [UPDATE: Sprint declined 13.7% for the day, while T-Mobile shares closed down 6.2%. AT&T finished down 1.1% and Verizon fell 4.3% Monday. The declines came amid smaller declines in broader market indexes.]

T-Mobile effectively offered to acquire Sprint, respectively the U.S.’s No. 3 and 4 carriers, for about $26.5 billion in stock under terms of the pact announced Sunday. The proposed deal would create a much stronger third competitor to the nation’s two biggest wireless operators, AT&T and Verizon.

T-Mobile’s parent company, Deutsche Telekom, would own 42% of the merged entity; Japan’s SoftBank, majority owner of Sprint, would hold 27% and investors would own the remaining 31%.

John Legere, T-Mobile’s long-locked, famously trash-talking CEO, would become chief executive of the merged company. The main rationale for the tie-up: to build a high-capacity 5G network across the U.S. with speeds up to 100 times faster than the current 4G standard.

“Only the New T-Mobile will have the network and spectrum capacity to quickly create a broad and deep 5G network in the first few years of the 5G innovation cycle,” Legere said in Sunday’s video announcement. “We can’t do this separately.” The companies claimed they would invest $40 billion over the next three years in 5G deployment.

The T-Mobile-Sprint merger isn’t a surprise, coming after months of on-again/off-again talks. Last November, the companies suspended their negotiations reportedly over disagreement over whether Deutsche Telekom or SoftBank would be the controlling owner.

The proposed deal’s approval by U.S. regulators is uncertain, given that it’s a “horizontal” combo of companies operating in the same business sector. Consumer advocates have argued that a T-Mobile/Sprint merger would reduce competition, cutting the number of national wireless carriers from four to three.

Legere and Sprint CEO Claure Marcello (who will join the new entity’s board) maintained that the merger would create “thousands” of new American jobs. They also pointed to the entry of cable giants Comcast and Charter into the mobile market.

The odds of T-Mobile-Sprint clearing regulatory hurdles is 50-50, according to MoffettNathanson’s Craig Moffett. “Ultimately, the regulatory question comes down to this: Will consumer welfare be measured by end-user pricing in a four- versus three-player market, or by the level of capital investment the two companies can support as one company, rather than two?” Moffett wrote in a note to clients Monday.

Meanwhile, the DOJ this week is wrapping up its antitrust case against AT&T’s $85 billion bid to buy Time Warner. Government regulators contend that deal would give AT&T excessive market clout and let it raise prices for rivals and consumers.

Deutsche Telekom has secured $38 billion debt financing for the proposed merger. Per the deal terms as outlined in a regulatory filing, if T-Mobile terminates the offer, it would be required to pay Sprint a $600 million breakup fee under certain circumstances.

T-Mobile is scheduled to report Q1 2018 earnings after market close Tuesday.

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