(Updates with closing share prices in 22nd paragraph.)
June 28 (Bloomberg) -- Dan Hesse’s White Room is closely guarded even within Sprint Nextel Corp. The chief executive officer carries the only key and draws black curtains over his scribblings before leaving. This is where Hesse retreats to map out “nukes” in red, blue and green ink, lately his tactics for stopping AT&T Inc.’s proposed takeover of T-Mobile USA.
“Clearly, purely, we want to win and block the merger,” said Hesse, during an interview at the company’s Overland Park, Kansas headquarters. “This one poses real risks.”
Hesse has already thrown personal and corporate resources at blocking AT&T. He tripled the amount of time he’s spending on government affairs, testifying before Congress and making regular trips to Washington. Sprint is organizing industry opposition and filed a 377-page dissent with the Federal Communications Commission. The company even tapped its own engineers to show AT&T how to get more capacity from its wireless network so it wouldn’t need to buy T-Mobile.
Hesse is just getting started. He’s courting top technology CEOs to come out against the deal and sway public opinion. He’s working to get as many as 18 state regulators to scrutinize the purchase, which may slow down approval or prompt divestitures. He’s working on other tactics he’s not ready to disclose.
Hesse’s company stands to lose if the deal goes through because, with less than half the revenue of AT&T or Verizon Wireless, Sprint would struggle to offer competitive pricing and the most cutting-edge phones. Sprint’s very survival as an independent company would be in doubt, he said.
What has Hesse so fired up is the conviction that he’s fighting for more than his company, that consumers and business customers will lose too. The U.S. telecommunications industry, the world’s leader from Alexander Graham Bell to the cellular phone, is at risk of stagnation if it’s controlled by two companies, he said.
“The industry just won’t be as innovative and as dynamic as it has been,” said Hesse, 57. “It’ll gum up the works when everything has to go through these two big tollbooths, one that’s called AT&T and one that’s called Verizon.”
AT&T makes the case its deal will actually benefit consumers. The Dallas-based company’s acquisition of T-Mobile will make it the largest wireless operator in the U.S., surpassing Verizon Wireless. Because of that scale, the company will be able to invest in more advanced networks and offer more wireless broadband, according to CEO Randall Stephenson.
The transaction is “about having the capacity to drive innovation and competitive prices for consumers,” Stephenson said in testimony before Congress in May. “Most important, it’s about giving consumers what they expect -- fewer dropped calls, faster speeds and access to state-of-the-art mobile broadband Internet service.”
‘Defy Economic Logic’
AT&T said it will also be able to operate more efficiently, driving down operating costs that are passed on to consumers.
“Their arguments about prices going up just defy economic logic,” said AT&T General Counsel Wayne Watts. “We’ve had wireless transactions multiple times over the last ten years and prices have gone one direction: they’ve gone down.”
Microsoft Corp., Facebook Inc. and Qualcomm Inc. have all voiced support for the acquisition.
AT&T needs approval from the Justice Department, which examines whether deals violate antitrust law, and the FCC, which decides if transactions are in the public interest. Sprint is fighting the proposed deal on both counts.
“I’ve had to wear a tie more often,” said Hesse, who favors blue jeans and open-collared shirts, in suit and pink necktie ahead of a trip to Washington.
Hesse has brought in extra guns for the battle, including lobbyists, consulting groups, two former U.S. House Judiciary Committee counsels and lawyers at Skadden, Arps, Slate, Meagher & Flom LLP. While AT&T has presented its acquisition as a fait accompli, with divestitures of some assets, Sprint does have a chance to block the deal outright, said Christopher Sprigman, former counsel at the Justice’s antitrust division.
“If Sprint can lay out how this hurts consumers and competition, the antitrust division is going to listen,” Sprigman, now a University of Virginia School of Law professor, said in an interview. “Sprint’s message is not one to be ignored. This merger is very likely to harm competition.”
Reed Hundt, former chairman of the FCC, said there’s no way to hold a company to a pledge, such as offering more wireless broadband in the U.S., unless the Justice Department imposes specific conditions as part of its acquisition approval.
“Making a promise to Congress is intrinsically not something that can be enforced,” said Hundt, who declined to comment specifically on the AT&T deal. “When the Department of Justice puts conditions on mergers it can enforce those conditions, because it can take people to court.”
One reason Sprint is getting state regulators involved is because it’s being outspent in Washington more than 12-to-1. AT&T’s political action committee contributed $3.26 million to federal candidates in 2009 and 2010, compared with $257,500 for Sprint, according to the Center for Responsive Politics, a watchdog group. California and Louisiana have already opened investigations.
Hesse is trying to generate public opposition to AT&T’s deal with national newspaper advertisements and an anti-merger website. And he’s recruiting allies among smaller wireless operators, including MetroPCS Communications Inc., Leap Wireless International Inc. and Cellular South Inc.
“There’s no divestiture or condition that would make this thing palatable,” said Sprint director Frank Ianna. “This is something from an anti-trust perspective, I don’t think should be allowed to go through.”
Sprint rose 7 cents to $5.22 at 4 p.m. in New York Stock Exchange composite trading and has gained 23 percent this year. AT&T added 26 cents to $31.02 and is up 5.6 percent this year.
Hesse, the son of an Army officer, grew up in Italy, Germany, Kansas and Nebraska. He graduated from Notre Dame in South Bend, Indiana, then earned an MBA from Cornell University and a master’s degree in science from the Massachusetts Institute of Technology. He spent 23 years at AT&T and ran the company’s wireless business for three years, before leaving in 2000 when another executive was tapped to lead the unit as AT&T spun it off.
Hesse said the current campaign isn’t personal. He sits with legs crossed in one of four oversized leather chairs in his office, surrounding a coffee table overflowing with newspapers and magazines he says he doesn’t have time to read. When asked about costing AT&T a $6 billion breakup fee if it can’t complete the T-Mobile purchase, he pauses and then leans forward.
“That’s just not my concern at all, one way or the other,” he said. “I’d feel like we did the right thing for the industry.”
Sprint is already struggling to keep up with its larger rivals. Hesse’s company hasn’t posted a profit since the third quarter of 2007 and it has shed contract customers, the people who sign up for lucrative ongoing monthly service, in 14 of the last 15 quarters. With 50 million contract subscribers, it has about half as many as either Verizon or AT&T.
Sprint has a greater debt burden than its larger rivals. Its debt-to-capital ratio is 57 percent, compared with 41 percent for Verizon Communications Inc. and 37 percent for AT&T, according to Bloomberg data. Sprint’s long-term debt is rated Ba3 by Moody’s Investors Service, three steps below investment grade, while Standard & Poor’s rates it an equivalent BB-.
“If the deal goes through, Sprint remains the No. 3 player in the industry; their ability to ever become an AT&T is shut off forever,” said Jonathan Chaplin, a Credit Suisse AG analyst in New York, who expects the merger will be approved.
The White Room
At the end of an interview, Hesse leads the way through the locked door in his office to the White Room. It’s named after the dry-erase white boards that line three walls, extending almost to the ceiling to accommodate the 6-foot, 5-inch executive. A small desk lined with colored markers sits in the middle of the room. Only one deputy has ever been inside.
Hesse explains that this is where he sketched out plans for Sprint’s partnership with Clearwire Corp. to roll out the first national fourth-generation wireless network, which he’s convinced prodded the bigger players to follow more quickly than they otherwise would have. It’s one example of how Sprint has helped push the industry forward for years, he said.
Sprint also introduced the first 4G phone, HTC Corp.’s Evo, pushing the technology into the market. On June 24, the company came out with the country’s first 3-D smartphone, also from HTC, that can be used without special glasses.
“We have to stand out, because we’re so much smaller,” he says. “We have to make people pay attention, do things that are innovative, do things that are breakthroughs.”
‘Like A Champion’
Above the door to Hesse’s office is a sign that’s a replica of one in Notre Dame’s locker room. It reads: “Play Like a Champion Today.” At his alma mater, football players touch the sign as they take the field for luck and motivation. Now it’s Hesse who says he’s taken to slapping the sign as he heads out for hearings in Washington or meetings with regulators.
“An underdog is not thinking about the point spread; they’re thinking about winning the game,” says Hesse. “We can win this.”
--With assistance from Mitchell Martin in New York. Editors: Peter Elstrom, Cecile Daurat
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