'A competitor will be removed' from the market if Sprint and T-Mobile are allowed to merge: Analyst

Key Points
  • The deal between the two telecommunications companies is a horizontal merger, says Jennifer Fritzsche of Wells Fargo Securities, which decreases competition in the market.
  • Fritzsche says the deal has a "50-50 [chance] at best" to be approved. But if it does, it will make the new company the third-largest wireless carrier in the U.S.
  • T-Mobile CEO John Legere says the merger will create jobs and lower prices. But Nick Economides, professor of economics at NYU's Stern School of Business, says just the opposite will happen.
We're going to be in 'deal purgatory', says analyst on T-Mobile-Sprint merger
We're going to be in 'deal purgatory', says analyst on T-Mobile-Sprint merger

A competitor could be removed from the market if T-Mobile's plans to buy Sprint are approved, said Jennifer Fritzsche, managing director at Wells Fargo Securities.

"This [merger] is a hundred percent a horizontal one," the analyst said on "Power Lunch" Monday.

The two telecommunications companies announced their plans to merge on Sunday in a deal valued at $26.5 billion.

Fritzsche pointed out that AT&T's $85 billion plan to buy Time Warner is a vertical merger, one between companies operating at different levels within an industry's supply chain, which can increase efficiencies. A horizontal merger is one between companies that operate in the same space, which can decrease competition.

The chances of the deal between Sprint and T-Mobile passing the regulatory process are "50-50 at best," Fritzsche said. But if they do merge, the combined company will be worth $146 billion, including debt, making it the third-largest wireless company in the U.S., behind Verizon and AT&T.

Combined subscribers for T-Mobile and Sprint would be about 120 million. Both Verizon and AT&T have more than 100 million subscribers each. The deal is also expected to help Sprint and T-Mobile compete in the 5G space.

Still, shares of both Sprint and T-Mobile fell Monday amid investor uncertainty over whether the deal will be approved.

T-Mobile CEO John Legere told CNBC on "Squawk on the Street" Monday morning that the deal with lead to more jobs in the U.S. and lower prices for consumers.

But, Nick Economides, professor of economics at New York University's Stern School of Business, said it's hard to go from four companies to three companies without increasing prices.

"Because we're going to eliminate the maverick, T-Mobile, from having the incentives to be so aggressive in terms of cutting prices," Economides said Monday on "Closing Bell."

"The nature of competition among three almost equal providers, which would be after the merger, is quite different than what we have right now," he said. "Right now, you get T-Mobile to be very aggressive."

But, Adonis Hoffman, former chief of staff and senior legal advisor at the Federal Communications Commission, said while prices typically rise during a horizontal merger, this might be the exception.

"This would be one case where we might see that axiom proven to be wrong," Hoffman said Monday on "Closing Bell." "I think we're looking at the possibility of having prices go down because their innovative and very aggressive marketing and advertising and business practices and structure."

Hoffman, who served twice on the FCC, including during the AT&T-Media One merger and the AOL-Time Warner merger, pointed out that a policy in place under former President Barack Obama was that "four carriers was sort of the law of the land."

But he said, "There's nothing to suggest four is a magic number as opposed to three. When we were at the commission considering those things, four seemed to be in place just because the FCC didn't have the bandwidth to deal with it. Now we have a whole different regime in place, and we'll probably see a whole different outcome," Hoffman said.