Photograph by John MacDougall/AFP/Getty Images

Attorneys general from 10 states filed a lawsuit Tuesday seeking to block the pending merger of
T-Mobile US

and
Sprint
,
but several Wall Street analysts still see a path to a deal.

Sprint stock (ticker: S) was up 0.3% on Wednesday morning after falling 5.9% on Tuesday, while T-Mobile stock (TMUS) was flat after a 1.6% drop the day before. The S&P 500 index was down 0.3% Wednesday morning.

The back story. The third- and fourth-largest U.S. wireless phone service providers have been pursuing a deal to combine since April 2018. The deal has been under extensive federal regulatory review ever since, with approval required both from the Federal Communications Commission and the U.S. Department of Justice. Sprint and T-Mobile believe that joining forces would give them the scale to better compete with industry-leaders
AT&T

(T) and
Verizon Communications

(VZ) in the move to next-generation 5G networks. Critics of the merger argue that shrinking the field from four major players to three would reduce competitive intensity and lead to higher prices for consumers.

The deal secured the backing of the head of the Federal Communications Commission last month in exchange for several concessions from the companies, including network commitments and a promise to divest Boost Mobile, a wholly owned subsidiary of Sprint focused on prepaid wireless plans. But the path to consummation is still rocky. DOJ antitrust division staff members reportedly recommended opposing the merger soon after, and the state AGs lawsuit is just beginning.

Previous efforts at consolidation among the big four wireless operators in the U.S. have failed, including a 2011 takeover attempt of T-Mobile by AT&T and an earlier Sprint/T-Mobile deal in 2017.

What’s new. The state AG complaint, filed in a federal court in New York, argues that the merger would cause consumer harm by making it easier for the carriers to raise prices—costing Sprint and T-Mobile subscribers over $4.5 billion a year. State AGs splitting with federal regulators is a rare move, especially given that neither the FCC nor the DOJ have given their final judgments yet.

Citi analyst David Phipps noted in a report to clients that the state AGs’ goal may be to pressure the DOJ to block the merger or to threaten to tie up the deal in litigation long enough that the companies decide to drop the merger.

FCC approval is likely a sure bet given its chairman’s support, and Cowen analyst Paul Gallant notes that if the DOJ was planning to block the deal it wouldn’t be engaging in lengthy negotiations with T-Mobile and Sprint over merger concessions. Those eventual conditions may be enough for the state AGs to change their minds.

“We expect the FCC and DOJ merger conditions should be sufficient to satisfy the state AGs,” wrote Phipps in a report to clients. “In the U.S., Federal law trumps state law so we would expect even if the state AGs press their lawsuits, the Federal review would eventually prevail.”

In that case, it will be up to the judge presiding over the case how to weigh the states’ and feds’ opposing arguments against each other. According to Gallant, the DOJ could also decide to postpone its judgement until the state AGs’ lawsuit concludes.

Looking ahead. Gallant expects a ruling from the New York federal court around January 2020, based on timelines for previous cases. He also expects the FCC to release its full ruling in the next week, according to rules requiring the agency to provide the information a month ahead of its July 10 meeting. The FCC’s chairman has said he wants to vote on the merger then. That could also provide greater insight into what the DOJ is focusing on.

“Despite the different legal standards of DOJ and the FCC, they’re actually quite similar—they both focus on the merger’s effect on competition,” Gallant wrote in a report Tuesday. “So the relative merits of T-Mobile’s case could soon be visible publicly.”

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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