Could a Sprint/T-Mobile deal win regulatory approval?

With reports indicating that Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) are closing in on a deal that would see Sprint pay around $32 billion for T-Mobile, the biggest question is: Could such a deal win approval from regulators at the FCC and Department of Justice? The outlook is decidedly unclear and probably not that favorable, according to most analysts and industry experts.

Click here for a look at a combined Sprint and T-Mobile in terms of networks, customers and financials.

No deal has been reached, according to reports, and any announcement is likely still several weeks off at the earliest. Sprint and T-Mobile have declined to comment on the speculation.

Yet the prospect that a deal is in sight has set off a new round of consideration over whether the transaction would pass regulatory muster. That question is particularly acute at a time when regulators are also evaluating proposed mega-deals between AT&T (NYSE: T) and DirecTV (NASDAQ: DTV) and Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC).

The Justice Department's antitrust division would evaluate the effect of any deal on competition in the U.S. wireless market, and the FCC would need to determine that the deal is in the public interest. Regulators at both agencies have said they favor maintaining four national wireless players, though commissioners at the FCC have said they would evaluate any deal on the merits.

The core of the argument that Sprint parent SoftBank and its CEO Masayoshi Son would likely make is that there are really three behemoths in the U.S. telecommunications market: Comcast, AT&T and Verizon Communications (NYSE: VZ), and that by allowing Sprint and T-Mobile to combine, the merged company would serve as a counterweight to the other companies and provide more competition.

"The theory that because everybody else is getting big, so you have to let me get big, has a lot of political resonance," Blair Levin, a former chief of staff for the FCC, told Bloomberg. "It doesn't have antitrust resonance."

According to research firm Strategy Analytics, when excluding wholesale and M2M customers, a combined Sprint/T-Mobile would have close to 100 million customers, giving it more wireless customers than AT&T and coming close to matching Verizon Wireless. The combined firm would lead in terms of a share of postpaid smartphone subscribers but would still trail Verizon and AT&T in both service revenues and EBITDA margins as a percentage of service revenues. Click here for details.

Most analysts and observers see a tough climb for Sprint and T-Mobile in convincing regulators. Gene Kimmelman, a former antitrust official who is now the CEO of public interest consumer group Public Knowledge, said a deal would have to climb "a very steep" hill, given T-Mobile's recent success in the market.

It would take a "huge lift to show how this [merger] leaves the market more competitive and better off" for consumers, Kimmelman said. "I'm not saying it can't be done, but it's a very big mountain to climb."

FCC Chairman Tom Wheeler has indicated his preference for maintaining four national carriers, and the FCC's broad mandate to ensure that a deal is in the public interest means that it is the agency with more heft in approving the deal. Sprint could fight a decision in court if the DOJ sued to block a deal on antitrust grounds, but the FCC's word on deals is pretty much final.

That's why speculation has turned to Democratic Commissioner Jessica Rosenworcel, who has reportedly indicated in private meetings that she would keep an open mind on a deal and that she thinks Sprint and T-Mobile could not survive on their own long term. If she were to vote with the two Republican commissioners to approve the transaction, that could give Sprint a way forward--but Wheeler could potentially draw out the process. Another FCC item to keep in mind is that the agency has said it might not reserve 600 MHz spectrum in next year's auction for Sprint and T-Mobile if the carriers decide to merge before the auction.

Yet another angle on the regulatory front is whether the FCC will take into account shifts in telecom that have seen a greater convergence of wireless and wired services, especially on video delivery.

"If regulators continue to see the wireless and wireline business as discrete markets, they will continue to be skeptical," Hal Singer, a principal at Economists Incorporated and a senior fellow at the Progressive Policy Institute, told the New York Times. "But if they can be convinced that the lines between wireless and wireline are beginning to blur," the deal would have a better shot at being approved, he said.

For more:
- see this WSJ article (sub. req.)
- see this NYT article
- see this Bloomberg article
- see this FT article (sub. req.)

Related Articles:
Report: Sprint close to $32B deal for T-Mobile
T-Mobile's Legere puts AT&T, Verizon on notice about potential tie-up with Sprint
Report: DT would keep a stake in T-Mobile in a merger with Sprint
DT open to creating 'super maverick' with T-Mobile US, but is wary of regulatory hurdles
SoftBank's Son acknowledges Sprint lags in LTE, voices admiration for T-Mobile's Legere
Report: T-Mobile wants $1B breakup fee from Sprint if a deal fails