PhoneArena has gotten hold of three internal T-Mobile screenshots that show MetroPCS will soon start selling two GSM/HSPA+ phones, the Samsung Galaxy Exhibit and the LG Optimus L9, and that customers will be able to bring unlocked GSM devices such as the iPhone to Metro as well. By virtue of using the global GSM standard, T-Mobile can actually start issuing SIM cards to Metro customers, which is exactly what it appears set to do.

T-Mobile screenshot acquired by PhoneArena

To put this in context, AT&T spent years running two separate network operations — which it called Orange and Blue — after Cingular acquired AT&T Wireless. To be fair, T-Mobile isn’t merging its network with Metro’s. It’s shutting Metro’s CDMA systems down completely, harvesting their spectrum for future T-Mobile’s LTE and HSPA+ networks. T-Mobile, however, plans to maintain the MetroPCS brand for prepaid services, so this move represents more an integration of customer management and billing systems than it does a complete integration of operations.

Still, if PhoneArena’s report proves true, it shows T-Mobile is serious about completing its network overhaul as fast as possible. The faster it gets those MetroPCS customers off of CDMA phones, the sooner it can shut down Metro’s networks.

But there’s a definite benefit for Metro customers as well. They get access to much bigger variety of phones, including devices like the iPhone that were never available to them before. They will have to pay full cost for many of those devices, but since Metro is a prepaid carrier, its customers are already accustomed to paying sticker price. Also, previously every new MetroPCS customer had to buy a new phone when they activated their service. GSM allows them to bring old devices to the network.

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MetroPCS’s current customers can choose from a variety of feature phones or inexpensive Android-powered smartphones: there’s just one flagship Android device offered, the Samsung Galaxy S III. The vast majority of the devices cost around $99. If MetroPCS subscribers have been waiting for an opportunity to switch to an iPhone, it’s probably less likely they’ll be going for a $200 to $300 iPhone. But the free-on-contract iPhone 4 or $99-with-contract iPhone 4S could be more appealing than their current options.

This also represents a chance for MetroPCS to convince feature-phone owners to upgrade too. And the trend among late-stage smartphone adopters is that they, in general, go for lower-cost devices.

A recent survey of iPhone buyers in the U.S. by CIRP showed while the iPhone 5 represented a little over half of all new iPhones purchased, that is a historically low number: never has an Apple device that’s been available for just over one fiscal quarter seen such slow demand. The iPhone 4 and iPhone 4S, either free on contract or $99 with a contract, are more popular than legacy iPhones have ever been.

T-Mobile says that by joining with MetroPCS, it’s bringing 9 million new customers — and potential new iPhone activations — with it. That might seem small when compared to what T-Mobile already has (a little over 30 million customers) and to what could happen if Apple hooked up with China Mobile. But at this point, Apple needs to expand its footprint anywhere it can. Whether that’s among luxury-brand hungry customers in Tokyo, Shanghai or Moscow who shell out for an iPhone 5, or among smartphone hold-outs who just want a free or very cheap phone, Apple is going to take it.

Last week, Apple CEO Tim Cook used the example of first-time iPhone buyers in China to explain why he’s OK with this scenario: ”China has an unusually large number of potential first-time smartphone buyers and that’s not lost on us. We’ve seen a significant interest in iPhone 4 there and have recently made it even more affordable to make it even more attractive to those first-time buyers. We’re hopeful that helps iPhone sales in the future.”

It’s true that trading iPhone 5 sales for the iPhone 4 or 4S could mean lower profits in the end for Apple. But being able to sell smartphones to people who otherwise wouldn’t have purchased an iPhone (either for a feature phone or a cheaper Android device) is not a bad fallback.

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The merger will combine the country’s smallest nationwide carrier with its largest regional carrier, giving the new company a total of 42.5 million wireless customers. That’s still not enough to overtake Sprint as the nation’s No. 3, but it will give the new company plenty of spectrum in key markets. T-Mobile has plotted a course that calls for delivering large quantities of mobile data to consumers at cheap prices and with no contracts. That strategy requires T-Mo to lay its hands on all the spectrum it can find.

Though Deutsche Telekom is the one making the buyout offer, T-Mobile will actually become a part of MetroPCS, taking advantage of the U.S. company’s placement on the New York Stock Exchange. DT, however, will own the majority of the shares, and – though we’ve been calling the new merger T-Metro for short – the company will take on the name T-Mobile USA. MetroPCS will live on as a brand in T-Mo’s arsenal.

The deal sailed over regulatory hurdles (the FCC didn’t even bother to vote on it), but it nevertheless suffered a close call when it came before Metro’s shareholders. Institutional investors took exception to what they considered DT’s low-ball offer and threatened to rage a proxy war to derail the deal.

DT at first played the tough guy refusing back down, but as the shareholder meeting approached earlier this month, it got nervous. MetroPCS rescheduled the meeting for this week, while DT proffered up a new terms – lowering the merged company’s debt load and that debt’s interest rates – to make the more attractive. It worked. The deal’s biggest opponent, hedge fund Paulson & Co., lifted its protests.

Once the deal closes, T-Mobile has a long integration process ahead – an ordeal that makes me question whether the merger is worth the trouble. T-Mobile, however, isn’t looking to duct tape together its GSM-based networks and Metro’s CDMA systems. It has something more radical in mind: cannibalizing MetroPCS for its spectrum. While T-Mo will keep the Metro brand and support its existing customers, the regional carrier’s CDMA and LTE networks are goners. T-Mobile plans to incorporate Metro’s spectrum into its ongoing network overhaul, creating very fast and high-capacity LTE and HSPA+ networks.

This post was updated at 9:30 AM Wednesday to add more background details.

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The revised deal would still create a publicly traded company, and DT would still maintain its originally proposed 74 percent ownership. But DT offered to slice $3.8 billion off of the debt the combined company would carry, dropping it to $11.2 billion. DT also said it would drop the interest rate on that debt by half a percentage point and agree to a longer lockup period of 18 months in which DT couldn’t sell it shares.

Metro’s owners wouldn’t get additional stock, nor would their $4.09-per-share buyout increase, but the DT tweaks ultimately would make the equity they do receive more valuable. DT estimates the lower debt level and lower interest rates would add $3 in value to Metro stockholders’ shares.

At first, the T-Metro deal looked like it would sail through the approval process. It encountered no antitrust opposition form the U.S. Department of Justice and the Federal Communications Commission found no regulatory reason to hold it up. The Committee on Foreign Investment in the U.S. raised no national security concerns.

But Metro’s institutional shareholders led by hedge fund Paulson & Co. claimed they were getting a raw deal and tried to recruit other stockholders to its side. DT at first stood its ground, saying the original offer was the best deal shareholders would get. Why did it change its mind? Well, according to Bloomberg, DT got a sneak peak at the absentee proxy ballots as they came in before Friday’s meeting. Apparently it didn’t like what it saw, leading to its decision to delay the vote and sweeten the pot.

Sign image courtesy of Shutterstock user Gary Paul Lewis

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So far the T-Metro deal has sailed past regulatory obstacles. The U.S. Department of Justice declined to initiate any antitrust review last week. The deal’s biggest remaining hurdle is a vote by MetroPCS shareholders on April 12. The MetroPCS board has already unanimously approved the deal, but institutional shareholders are opposing it, trying to hold out for a better terms.

The lack of a full commission review and vote is sure to earn the ire of the Communications Workers of America, which anticipated the FCC’s move earlier this week and tried to stop it. The “full Commission has voted on much smaller transactions, including the $72 million Guam Cellular/DoCoMo Guam transaction and the $2.8 billion AT&T/Dobson deal,” CWA said in a statement Monday. “There is no reason that the full Commission should not fully evaluate and assess all the elements of this $30 billion deal.”

Considering the deal would merge the country’s fourth and fifth largest carriers, you’d think the deal with merit the commission’s full attention. But in its declaratory ruling, the FCC’s Wireless Telecommunications Bureau staff said that the benefits of the deal for competition and the public interest were numerous:

… we find that the transaction is not likely to result generally in competitive or other public interest harms. In addition, to the extent there may be some possible competitive harms in selected geographic areas, we find that these possible competitive harms are outweighed by certain public interest benefits likely to result from the proposed transaction. Such benefits include the facilitation of Long Term Evolution (“LTE”) deployment, the expansion of the MetroPCS brand into new geographical markets, the development of a more robust, national network, improved quality of service, and the strengthening of the fourth largest nationwide service provider’s ability to compete in the mobile broadband services market.

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That’s one major hurdle overcome to closing the deal, which would make T-Metro a publically traded company majority owned by DT, though it still faces regulatory scrutiny from the Federal Communications Commission as well as vote from Metro stockholders.

The DOJ’s tacit blessing, however, isn’t a trivial matter. The Justice Department has become much more actively involved in U.S. telecom deals ever since it joined forces with the FCC to kill AT&T-Mo in 2011. Since then it has thrown up a roadblock to Sprint’s mammoth deal with Softbank, citing national security issues. It also played a big role is shaping Verizon’s spectrum acquisition and partnership with the cable providers, though it eventually let that deal slide through despite its potential impact on broadband competition.

The fact that T-Metro’s paperwork passed through the DOJ’s offices without a word is a good sign that the deal will surmount its remaining regulatory hurdles without a hitch. While the DOJ has frowned on consolidation among the Big 4 U.S. operators, this deal would combine the smallest nationwide operator with the biggest regional operator and put T-Mobile in a much stronger spectrum position. Since AT&T-Mo, regulators have been, first and foremost, concerned with maintaining the four-operator equilibrium at the top of the mobile market.

The combined spectrum of T-Mobile USA and MetroPCS as compiled by Mosaik

MetroPCS has set a vote for on the deal on April 12. The hedge funds opposing the deals want MetroPCS to negotiate better terms with DT – creating either a less debt-laden final company or giving Metro shareholders a better payout – but so far they only represent a little more than 10 percent of the voting shares of the company. But DT seemed worried enough about their influence to issue a warning Wednesday to those stockholders.

“The MetroPCS board unanimously recommends that stockholders vote their shares FOR all of the proposals relating to the proposed combination with T-Mobile,” DT said in a statement. “The failure to vote or an abstention has the same effect as a vote against the proposed combination.  If stockholders vote against the proposed combination, there is no assurance that MetroPCS will be able to deliver the same or better stockholder value.”

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This doesn’t mean we’ve seen the last of Sprint in this drama. It has a few months before “T-Metro” is a done deal. Sprint and Metro have supposedly been engaged in a long, bizarre behind-the-drapes courtship for almost a year. Is Sprint really ready to let go of its on-again, off-again romance with Metro completely?

My bet is yes. As I wrote last week, Sprint has enough on its mind managing its own network overhaul and working through wreckage of its last failed marriage to Nextel. While at first glace, MetroPCS as a CDMA and LTE operator would seem a perfect fit for Sprint, but on closer inspection their bands don’t line up. Sprint-Metro would face similar if not more difficult integration issues as T-Metro.

Photo courtesy of Shutterstock user Susan Law Cain

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In short, the new carrier – which the companies are referring to as NewCo while waiting for regulatory approval – would be much greater than the sum of its parts, according to Legere, who would take over the helm of the new carrier. “When you add MetroPCS to an already aggressive challenger strategy, it acts as an accelerant,” he said.

T-Mobile USA CEO John Legere

From a consumer’s perspective, there’s a lot to like in combined T-Mobile and MetroPCS assuming they can pull their complex transition plan off. Its 42 million subscribers would still leave it the No. 4 carrier in the U.S. rankings, but it will have closed considerable distance with No. 3 Sprint. What’s more, those two subscriber bases would match up almost perfectly, Legere said.

T-Mobile already has a sizable prepaid customer base, but the merger would allow it to expand Metro’s highly successful contract-free business model beyond its regional footprint of a dozen big cities. The companies’ combined networks and economies of scale would allow them to get even more aggressive with mobile data pricing. Legere said NewCo would be able to offer unlimited data plans not just to contract customers but prepaid ones as well.

During the call, however, it quickly became apparent what T-Mobile parent Deutsche Telekom saw as the biggest advantage of the deal. It all comes down to spectrum.

The Big Apple gets big LTE

T-Mobile will be able to bulk up its 4G airwaves in some of the key cities where bandwidth is in highest demand, such as New York City, San Francisco and Los Angeles. In the top 25 markets, T-Mobile will see its average spectrum holdings increase from 63 MHz to 76 MHz, and much of those gains will be in the Advanced Wireless Service (AWS) band where both companies are launching LTE.

T-Mobile currently has the spectrum to launch a 20 MHz network in half of its metro markets, but it would only be able to support a 10 MHz network in other regions. Metro’s licenses certainly don’t fill in all of those holes, but in 11 major cities the combined company will have more 50 MHz of AWS spectrum, enough for NewCo to launch a mammoth 40 MHz network. That’s double the size of any 4G network AT&T or Verizon(vod) has today.

Those gains are nothing to scoff at, but it’s important to note that they’re only in handful of markets. For every New York and LA, there’s a Chicago or Washington, DC, where T-Mo’s position remains unchanged. Also it will take time for NewCo to clear those airwaves. Right now MetroPCS has both 2G and 4G in the AWS band, so the band will have to be cleared of CDMA before its capacity can be repurposed entirely for LTE. According Legere, that transition would be complete by the end of 2015. That leaves three years in which the carrier will be running two separate, incompatible networks.

This is no Sprint-Nextel

On Tuesday I compared the merger to Sprint’s ill-fated acquisition of Nextel. Forced to run two separate networks and manage two separate customer bases, Sprint has been far worse for the wear for the last seven years. Legere, however, bristled at the comparison.

“The sound-byte that this is a Sprint-Nextel do-over is absolutely completely wrong,” he said. “Nothing could be further from the truth.”

Legere’s point is that Sprint and Nextel launched into their ill-advised marriage with the aim of running separate networks. T-Mobile’s aim is to shutter Metro’s CDMA systems as quickly as possible and create a unified network. As soon as the merger is complete, NewCo will begin selling as HSPA-LTE devices to MetroPCS’s customer base, and given Metro’s prepaid model turnover will be very quick.

Legere said 60 percent of Metro’s customer base switches out handsets on an annual basis. If those trends hold, the majority of Metro’s 9.3 million customers will have HSPA devices in two years. At that point, NewCo will have to offer incentives (read: free handsets) to the remaining holdouts before the CDMA kill date arrives, he said.

I still think T-Mobile and MetroPCS are being overly optimistic. The new company may not have to endure Sprint’s 7 years of operational hell, but it still faces three years of such hell. T-Mobile has two conflicting objectives here: to harvest Metro’s spectrum and the keep Metro’s customers. I’m not saying it can’t accomplish both, but its certainly not going to be easy. Even if it meets its timeline, NewCo will still spend several years managing two disparate networks while transitioning 10 million subscribers to a new technology.

The question is whether all of that hassle is worth the relatively limited gains. Remember we’re not talking about a new nationwide network here. We’re only talking about boosted 4G capacity in a dozen major markets.

Handshake image courtesy of Flickr user buddawiggi; NYC skyline photo provided by Shutterstock.

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