US: Getting approval for Sprint merger
The Sprint transaction highlights the Federal Communications Commission Mergers and Acquisition review process, says Keller and Heckman partners David Reader and Gregory Kunkle.
Sprint Nextel Corp (“Sprint”), the third largest wireless carrier in the United States, recently found itself to be a very sought after wireless services provider. Not necessarily by customers, as Sprint lost more than 250,000 subscribers during the first quarter of 2013. Instead, Sprint found itself weighing competing takeover offers – a $20.1 billion offer from SoftBank Corp. (“SoftBank”), a Japan based telecommunications company, and a $25.5 billion offer from DISH Network Corp. (“DISH”), a U.S. satellite television provider.
The parties spent several months arguing their various positions to the Federal Communications Commission (“FCC”), until DISH ultimately withdrew its offer at the end of June and the FCC consented to the SoftBank transaction on July 3, 2013. The Softbank/Sprint deal closed on July 10, 2013 nine months after talks began last October. The transaction is a good opportunity to explain the FCC’s role in the merger and acquisition of telecommunications providers and the purchase and sale of their key assets – FCC wireless licenses.
The FCC review
The FCC is an independent United States government agency that regulates telecommunications in the U.S. and its territories.Under Section 310(d) of the Communications Act of 1934, as amended, no FCC wireless license may be assigned or transferred, either voluntarily (through an asset acquisition) or by transfer of control of the license-holding entity (through an equity acquisition), without the prior consent of the FCC. Because SoftBank’s offer was made six months prior to DISH’s involvement, the FCC was on its way toward completing its review of the proposed Sprint-SoftBank merger when DISH made its offer. For its part, DISH initially encouraged the FCC to wait on its review until Sprint picked between suitors.
Significant public interest benefits
DISH argued that a merger between Sprint and DISH would offer significant public interest benefits not present in the SoftBank deal, including because DISH (a) holds spectrum that is compatible with Sprint holdings and (b) has an existing nationwide service installation network that could bring 4G wireless to rural America. Such public interest benefits are a key component of the FCC’s review but it is unique for the FCC to be asked to weigh one purchaser against another. Typically those issues are settled on the private market with the FCC serving as a gatekeeper to review the final decision of a company’s shareholders. In any event, those arguments were never addressed since DISH withdrew its offer before the FCC issued its consent to the SoftBank transaction.
Minding the regulator
Sprint, a major wireless services provider, clearly understood its obligation to obtain the FCC’s consent to the proposed transaction.The application of this requirement may be less obvious to smaller telecommunications service providers, non-telecommunications providers that hold FCC licenses for internal communications, as is common in many industries including manufacturers, utilities and energy companies, and transportation, and those who desire to enter the telecommunications business.
For such companies the fact that their operation is governed by, and completion of the deal hinges on, the FCC is often overlooked during a merger, equity purchase or asset sale. What follows are some suggestions to overcome the FCC hurdle.
Identify FCC “Regulated Assets"
1) Telecommunications Assets Involved.
Ascertaining the steps necessary to comply with the FCC’s requirements begins with an identification of the telecommunications assets involved in the deal. A transaction for the sale of wireless licenses will differ from a transaction that also includes infrastructure, such as towers and equipment. The terms and conditions for a transaction that includes customers will differ yet again.
Where only wireless licenses are involved, the FCC generally requires that the parties submit an application seeking consent to the transaction in advance of closing. A purchaser who wants to relocate the license coordinates to its existing towers and base stations may also desire FCC consent at this pre-closing stage. The process may be slightly different where infrastructure is part of the deal. For example, the sale of a tower can be reported to the FCC immediately after closing. When the deal includes a customer base, the parties must notify customers and comply with prior notification requirements to the FCC.
2) Length of FCC Review Process.
The level of complexity involved in the FCC’s review process varies depending on the type of transaction. Certain transactions can be approved in as little as one day. Others, particularly those involving telecommunications service providers, may take several months. The Sprint/SoftBank merger described above was under review for over seven months.
3) The Closing
The parties may consummate the underlying deal only after the FCC has processed the application and consented to the transaction. Closing must take place within 180 days of the release of the Public Notice of the FCC’s consent to the transaction, although extensions of the 180-day period are routinely granted if closing is delayed. Once closing occurs, the acquiring entity must submit a Notification of Consummation providing the FCC with the closing date within 30 days thereafter. Selecting the closing date, however, is otherwise left to the discretion of the parties, and the FCC does not specify a date for closing to occur. Waiting until after closing has occurred to obtain FCC consent to a transfer of licensee control or assignment of licenses may result in fines or other penalties for failing to request and secure prior FCC consent to the transaction.
Negotiation, Due Diligence and Documentation
The need to identify FCC regulated assets and obtain FCC consent are only part of the negotiations, documentation and due diligence associated with the transaction.
While the parties will bring to the negotiations their perception of deal value and desired items, they will ultimately through negotiations decide on the broad parameters of the deal which most likely (a) will include the deal structure and assets being bought and sold, the price (including purchase price adjustments and payment terms (such as deposit, periodic payments, installment payments and interest)), and (b) may identify circumstances where a breakup fee and/or deposit return is appropriate if no closing occurs, and (c) establish post-closing obligations. The parties’ business people, lawyers, accountants, and financial advisors will be involved in any or all negotiations, and should be involved early to help ensure the definitive agreement accurately describes the deal contemplated.
The negotiations will be memorialized by a written agreement reflecting the negotiations. The agreement will also address items that were not brought up during negotiations but which relate to and/or clarify the negotiated items, arise from due diligence review, and present usual and customary representations, warranties, covenants, conditions, and indemnities typical of these types of deals. In order to get to the definitive agreement, the parties may have executed previously a confidentiality agreement and letter of intent/memorandum of understanding. Bottom line, the parties should expect the definitive agreement to address more than what was negotiated, but reflect at least what was negotiated. Lastly, do not overlook the closing deliveries. Make certain those documents do not change the benefit of the bargain.
Due diligence is a party’s way to confirm all that the other party is saying about the business and items (including any FCC licenses) to be acquired. Negative findings stemming from a due diligence review may stop the transaction before definitive agreement negotiations commence or permit a party to terminate a deal after signing an agreement. Due diligence will shape the definitive agreement and each party’s protective devices.
Parties are strongly advised to seek FCC consent at the outset, rather than to beg for forgiveness after the deal closes for failure to request agency prior consent. Identifying when FCC-regulated assets are involved in the transaction, and addressing those assets and FCC requirements upfront can save time and money. Couple that with a properly drafted definitive agreement to preserve the deal and protect your interests.
ABOUT THE AUTHORS
David Reader and Greg Kunkle are partners in the Washington DC office of Keller and Heckman LLP.
Mr Reader practices in the Business Counseling and Transactional Group assisting clients with business transactions. He graduated from State University of New York at Albany in 1980 and received his J.D. from Southwestern University School of Law in 1983 and his LLM in Taxation from Georgetown University in 1986. He can be contacted by email at email@example.com.
Mr Kunkle practices in the area of telecommunications, assisting corporate clients and trade associations with various legal and regulatory matters including those before the Federal Communications Commission. He graduated from Virginia Tech in 1996 and received his J.D. George Mason University School of Law in 2001. He can be contacted by email at firstname.lastname@example.org.