The Federal Communications Commission on Monday (Nov. 22) approved Verizon Communications’s proposed $6.9 billion purchase of wireless service reseller TracFone Wireless.

TracFone is owned by Mexican telecom company America Movil.

“After rigorous review, the commission found that the transaction, as modified by Verizon’s enforceable commitments, will make Verizon and Tracfone stronger providers of prepaid and Lifeline services,” the FCC said.

Public interest groups, with the backing of Democratic legislators, had agreed to drop their challenge to the deal last August after Verizon agreed to a host of conditions that the FCC has now baked into its approval, plus ones of its own including strong enforcement (see below).

Some top legislators, including Sens. Richard Blumenthal (D-Conn.) and Ed Markey (D-Mass.), had told the FCC that as important as the conditions were, they had to be made “legally binding, vigilantly monitored, and vigorously enforced to ensure the company makes good on these promises.”

“Verizon welcomes the FCC’s approval today of our TracFone acquisition,” senior VP and deputy general counsel of public policy and government affairs Kathy Grillo said. “The deal will provide customers with the best of both worlds: more choices, better services and new features thanks to Verizon’s investment and innovation. Customers will benefit with enhancements in devices, network performance and innovative products and services — as well as a continued commitment to Lifeline. … We will work hard to serve TracFone’s current customers and look forward to serving new ones in this dynamic and fast-growing marketplace.”

According to the FCC, Verizon must:

· “Offer TracFone’s Lifeline-supported services over the same service areas for at least seven years;

· “Offer a free, compatible device or SIM in certain circumstances where Lifeline customers are being required to transition to Verizon’s network;

· “Continue to offer and advertise existing Lifeline plans, with no added co-pays to TracFone’s existing Lifeline plans offered at no cost to prepaid customers for at least three years;

· “Make available to existing and new Lifeline prepaid customers a 5G plan and offer a range of cost-effective 5G devices to existing and new Lifeline customers;

· “Maintain a specified level of marketing and advertising expenditures for Lifeline;

· “Establish and maintain a dedicated website with information about the Lifeline program and a dedicated customer service line for Lifeline customers;

· “Maintain TracFone’s existing MVNO agreements to serve customers outside Verizon’s network coverage (including Puerto Rico, and maintain existing TracFone rate plans for new and existing customers for three years;

· “Maintain an exclusive, toll-free customer service line for customer transition;

· “Conduct outreach, advertise, and display all plans on a dedicated website;

· “Notify customers at least twice before they are transitioned to Verizon’s network;

· “Offer a free, compatible device or SIM in certain circumstances where Lifeline customers are being required to transition to Verizon’s network;

·  “Extend its 60-day unlocking period to all 700 MHz C Block devices purchased from TracFone after closing and activated on the Verizon network;

· “Provide notice to affected TracFone customers of its unlocking policy;

· “Provide MVNOs that have current contracts with Verizon an option to extend, subject to certain limitations specified in the order, their existing MVNO wholesale agreements, on the same terms and conditions, on a month-to-month basis until three years after the transaction closes;

· “Submit publicly available semi-annual reports describing its compliance that includes information regarding Lifeline and non-Lifeline customers for seven years;

· “Pay for and retain both an internal company compliance officer and an independent compliance officer to ensure compliance with these commitments for seven and a half years; and

· “Assume liability for forfeitures, restitution, or other obligations that may be imposed by the commission or the Universal Service Administrative Company (USAC) on TracFone. In addition, Verizon will comply with any agreements with the commission or USAC, including following any compliance plans, or other obligations, agreed to by TracFone, its subsidiaries, or any successors or assigns.”

Public-interest groups have agreed to drop their challenge to Verizon Communication's proposed $6.9 billion purchase of TracFone Wireless after the telecom agreed to a bunch of their conditions.

Those include extending lifeline services for at least three years after the deal closes.

Also Read: Dems Urge FCC to Impose Lifeline Conditions on Verizon-TracFone Deal

Public Knowledge, Access Humboldt, the Benton Institute for Broadband and Society, the California Center for Rural Policy, and Communications Workers of America submitted a letter to the Federal Communications Commission late Wednesday (Aug. 11) withdrawing their objections to the deal contingent on the FCC making Verizon's agreed-upon conditions “enforceable and mandatory.”

The groups reserved the right to remain “active” in relevant state reviews of the deal, saying “but more searching review may be required under the law and policy of each state where the transaction is under review.”

At the same time the groups were pulling their challenge, Verizon sent its own letter to the FCC, noting that "some stakeholders have expressed concern about certain aspects of the transaction, in particular its impact on TracFone’s Lifeline offerings and the introduction of 5G services and devices in the prepaid segment," and saying it had resolved them in discussions with the above parties.

Those conditions are as follows:

1.) "Lifeline Service. Verizon commits to continuing to offer TracFone’s current Lifeline-supported services for a minimum of 3 years following the close of the transaction.

2.) "Lifeline Plans. Verizon will not add new co-pays to TracFone’s existing Lifeline plans offered at no cost to prepaid customers for at least 3 years after the transaction closes, provided that the terms of the Lifeline program do not change in a way that materially increases costs or decreases the subsidy. Nothing in this commitment shall prevent Verizon from pursuing compensation through state or federal device reimbursement programs so long as no unrecovered costs are passed on to Verizon’s Lifeline subscribers.

3.) "Marketing. Verizon commits to maintaining at least the same budget as TracFone did in 2020 for Lifeline Marketing throughout TracFone’s entire service area for at least 3 years following the close of the transaction.

4.) "No Customer Left Behind. Verizon commits to honor the rates, terms and conditions of the MVNO [mobile virtual network operator] agreements that Verizon is assuming from TracFone, and to provide resold voice and data services consistent with the terms of those agreements for at least years after the transaction closes. Verizon also commits to negotiate in good faith with an MNO to extend the terms of TracFone’s existing MVNO agreements for up to 3 years after the transaction closes if doing so would be necessary to avoid service disruption to a significant number of TracFone customers. Nothing in this commitment will require Verizon to modify the rates, terms, or conditions of any agreement it assumes from TracFone.

5.) "5G. Within 6 months after the Transaction closes, Verizon will make available a TracFone service plan to Lifeline prepaid customers that includes 5G service. And Verizon will increase the range of cost-effective 5G devices available to TracFone customers using commercially reasonable subsidy practices supported by regulatory flexibility.

6.) "Enforcement. For a period of 3 years after the close of the transaction, Verizon commits to submitting a quarterly report to the Commission that includes the current number of Lifeline subscribers within the service area Verizon will acquire from TracFone, data regarding its migration of customers from TracFone’s other underlying networks to Verizon’s including the number of devices that have successfully transferred, and the availability of 5G for Lifeline customers, including which geographic service areas have access to Verizon’s 5G network and how many Lifeline customers are receiving 5G service. The report will list all states where TracFone offers a Lifeline-supported service, and will provide a state-by-state breakdown of amounts spent on advertising and other marketing activities associated with Lifeline. Verizon may file proprietary information with the Commission on a confidential basis, making it available only to representatives of parties to the transaction docket who have signed the relevant protective order (either during the pendency of the proceeding or thereafter) provided that Verizon shall also file a public version redacting the proprietary information to be available for review by the public."

"The Public Interest Groups believe that these conditions adequately address their concerns," they said in their letter. 

A group of Democratic senators was taking credit for Verizon's agreement to the conditions, but giving some props to the public interest push as well.

“We are pleased that at our urging, Verizon has made new public commitments regarding Lifeline and budget subscribers as it readies its buy ofTracFone,” said Sens. Richard Blumenthal (D-Conn.), Sheldon Whitehouse (D-R.I.), Dianne Feinstein (D-Calif.), Ron Wyden (D-Ore), and Ed Markey (D-Mass.). “We congratulate the public interest organizations that fought vigorously for these vital protections. These commitments should now be a floor and a starting place for the FCC’s review of the acquisition and negotiations with Verizon. As important as the terms of these commitments are, the conditions must be made legally binding, vigilantly monitored, and vigorously enforced to ensure the company makes good on these promises.”

Democrats are urging the FCC to take a hard look at Verizon's proposed $6.9 billion purchase of TracFone, but there concern is not so much concentration as Verizon's commitment to the Lifeline low-income internet broadband subsidy program.

That came in a letter to acting FTC chair Jessica Rosenworcel from Sens. Richard Blumenthal (D-Conn.), Sheldon Whitehouse (D-R.I.), Dianne Feinstein (D-Calif.), Ron Wyden (D-Ore.), and Ed Markey (D-Mass.), who pointed out that TracFone was one of the largest operators in the Lifeline program.

Also Read: Verizon to Buy TracFone

Verizon has pledged to continue TracFone's support of Lifeline, but the senators want the FCC to take a not quite trust and definitely verify approach to that pledge, saying that Verizon "would have significant incentives and opportunities to push subscribers from Lifeline and inexpensive prepaid services to higher revenue plans.”

That is why they said the FCC should turn Verizon's pledge into binding deal commitments. In addition to making participation in Lifeline a condition of the deal, they argue the FCC should also require to make 5G available to Lifeline and prepaid subs at the same rate as other Verizon customers.

In addition to making participation in Lifeline a condition of the deal, they argue the FCC should also require to make 5G available to Lifeline and prepaid subs at the same rate as other Verizon customers.

As it moves ahead to build out its planned 5G wireless service, Dish Network is facing a new dilemma after T-Mobile said it would decommission its 3G CDMA network service on Jan. 1, 2022, a move that could effectively cut Dish-owned Boost Mobile's prepaid wireless business off at the knees.

Dish revealed in its 10-K annual report that T-Mobile would discontinue the CDMA network. T-Mobile sold Boost Mobile to Dish in 2019 for about $1.4 billion in a side deal related to T-Mobile's purchase of Sprint for $26 billion.  

In the filing, Dish said the decommissioning would have a “material adverse effect” on its wireless business. Dish must either migrate Boost’s 9 million customers more quickly to the network Dish hasn’t built yet, purchase an enormous amount of new handsets to allow Boost customers to access T-Mobile’s 4G network or suffer a torrent of wireless customer defections. Dish appeared, during a conference call with analysts to discuss Q4 results, to be gearing up for the defection scenario. 

“It’s hard to upgrade, to go from a phone that works great and works in their territory, and then go to another phone that won’t even work on our network, because we’re 5G,” Ergen said. “So then we have to upgrade them again. So if you run the numbers on that, there would be significant fallout from that, in my opinion.”

Also Read: Dish Wireless Pushed Forward 

Boost Mobile has about 9 million customers, so providing new handsets to those customers would be a logistical nightmare. Ergen said it might even be impossible to execute. 

“I don’t even think we could get the supply of the phones that we would need,” Ergen said. “You can’t order phones and not know that you can move the phones, and the supply is somewhat limited for the kind of phones we might need for that. So that’s a material risk that’s out there on Boost.”

Boost has been losing subscribers already, shedding about 363,000 customers in Q4 and 212,000 in Q3. But the service has very high EBITDA margins compared with other wireless businesses. Boost Mobile's wireless profit margin was 16.3% in Q4, higher than the 10% margin for similar prepaid services like Tracfone, and more than five times the 3% margin some analysts expect for the 5G wireless service when it becomes available.

On the call, Ergen said Boost Mobile's profitability likely was not sustainable, a fact exacerbated by T-Mobile’s plans to decommission the network.

“Unfortunately, the revelation about having to migrate its customers off CDMA so quickly suggests a very challenging year ahead, both for subscribership and for costs,” MoffettNathanson principal and senior analyst Craig Moffett said in a research note.  

Aside from providing a steady wireless revenue stream while it moves to build out its 5G network -- Boost revenue was about $1.2 billion in Q4 -- the prepaid service was supposed to serve as a springboard for the larger postpaid offering once it was launched. According to Moffett, Boost was expected to provide a retail brand, store locations and a customer base that could eventually be converted to Dish’s 5G network. 

Dish might be able to get some relief from the federal government, or at least more time to migrate customers. Asked on the call if he had contacted the Federal Communications Commission about T-Mobile’s CDMA shutdown, Ergen said he hadn’t spoken to the agency personally, but it is possible one of his staff may have. He said he believed T-Mobile’s decision to discontinue the CDMA service was anti-competitive. He noted that Boost customers are “economically challenged,” and that removing one of their options to access affordable wireless services, especially during a pandemic, seems to go against the motivation for allowing Dish to buy the service in the first place -- which was to maintain a fourth national wireless provider. 

“We are one of four providers,” Ergen said. “Washington picks winners and losers, and they make policy that affects people one way or the other. And we’ve had some good luck, we’ve had some bad luck with that, as have others.”  

Verizon Communications said Monday that it has agreed to purchase prepaid wireless giant Tracfone for $6.25 billion in cash and stock. The deal is expected to close in the second half of 2021.

Tracfone, owned by Mexican wireless giant America Movil, is the largest reseller of  wireless services in the U.S., with 90,000 retail locations and more than 21 million customers. Verizon already has a relationship with the company -- about 13 million Tracfone customers currently rely on the Verizon wireless network via an existing wholesale agreement.  

Verizon said in a press release that after the deal is completed, it plans to sell 5G service to Tracfone customers, as well as further develop the prepaid wireless giant’s distribution channels and expand its market opportunities. 

“This transaction is aligned with what we do best: providing reliable wireless service alongside a best-in-class customer experience,” Verizon chairman and CEO Hans Vestberg said in a press release.  “We are excited about the opportunity to bring Tracfone and its brands into the Verizon family where we can put the full support of Verizon behind this business and provide exciting and compelling products into this attractive segment of the market.  We are pursuing this important strategic acquisition from a position of strength given our very strong and prudent financial profile.”

The deal includes about $3.125 billion in cash and $3.125 billion in Verizon stock. In addition, American Movil could get an extra $650 million in cash if Tracfone hits future certain performance targets. Verizon said it expects the deal to be accretive in its first full year after the close, adding that it will bring Tracfone’s 850 employees into the fold. 

Verizon shares were up about 1% (80 cents each) to $60.49 per share in early trading Monday. 

“We’re looking forward to welcoming all of Tracfone’s customers and each of Tracfone’s nearly 850 valuable employees,” Verizon Consumer Group EVP and Group CEO  Ronan Dunne,  said in a press release.  “We are excited to expand our relationship with Tracfone’s distribution partners, and when Tracfone’s customers become part of our family, they will get the best of both worlds – more choices, better services, and new features thanks to Verizon’s investment – but with the flexibility and control that they have come to value with its prepaid plans.  Being connected is now more important than ever, and Tracfone customers will benefit from Verizon’s innovations – both now and in the future.”

The deal comes about two months after Dish Network purchased prepaid wireless company Boost Mobile for $1.4 billion, as part of the regulatory concessions T-Mobile made to complete its $26 billion buy of Sprint.  Boost has about 9 million prepaid wireless customers in the U.S., and Dish has planned to operate that business alongside its planned post-paid wireless offering. 

Credit Suisse acted as financial advisor to Verizon and Debevoise & Plimpton acted as legal advisor.

The FCC has proposed a $6 million fine against prepaid service provider TracFone Wireless. 

The FCC's Enforcement Bureau said the company apparently claimed Lifeline subsidies for customers who were not eligible to receive them. At issue are thousands of subs in Texas and hundreds of subs in Florida. 

Related: FCC Won't Drop Suspect Lifeline Subs 

The FCC said that was because sales agents in Florida, working on commission, manipulated eligibility information of existing subs to enroll fictitious accounts. In Texas, the company allegedly claimed more Lifeline support than the Texas Public Utility Commission authorized. The PUC is the one who makes eligibility calls in the state. 

The fine is based on a total of 5,738 apparently improper claims from a single month--June 2018--plus a bump up for the "egregious conduct" of the Florida agents.  

The Lifeline program is a monthly Universal Service Fund (USF) subsidy of up to $9.25 on broadband and phone service for low-income consumers. Participating carriers get money for each eligible sub, which they must pass through in the form of a discount. The USF fund comes from fees on consumer's phone bills. 

“Every dollar misdirected from the Lifeline program to a carrier that violates our rules is a dollar that won’t go toward providing more affordable connectivity to low-income Americans,” said FCC Chairman Ajit Pai in a statement. “Ensuring that this program works for those who need it most is especially important now, during the ongoing coronavirus (COVID-19) pandemic." 

The FCC has already taken steps to boost the Lifeline program, including temporarily waiving some rules aimed at safeguards against waste, fraud and abuse. But Pai signaled with the proposed fine that the FCC was still rooting out such waste, fraud and abuse when it found it," adding "I’m hopeful that our new rule prohibiting carriers from paying commissions to employees or sales agents based on the number of Lifeline customers they sign up will help deter the kind of apparent fraud we’ve seen in this case.”