The Sprint/T-Mobile tie-up will probably be rejected. But if it’s approved…

Sprint’s proposed acquisition of T-Mobile hasn’t actually been announced yet, but multiple reports indicate a merger is likely to finally be unveiled sometime this summer. While the details are still being ironed out, the carriers reportedly have settled on a $32 billion deal that would see Sprint pay $40 a share in cash and stock, marking a substantial premium over trading prices in recent days. Deutsche Telecom will keep a 15 percent to 20 percent stake in its U.S. carrier.

The gap in the price of shares indicates investors are unconvinced regulators would approve any deal, and that skepticism is well-founded. Both the U.S. Justice Department and the Federal Communications Commission must independently approve the marriage, and unnamed regulators have already signaled their reluctance to allow the field of major carriers to shrink to three from four. And it won’t help the carriers’ case that T-Mobile has made impressive strides over the last year or so, which would seem to indicate that the industry is at least somewhat competitive today.

It’s worth noting that Washington demonstrated that reluctance when it essentially spiked AT&T’s effort to pick up T-Mobile in 2011 (which, admittedly, was a very different proposition). Also, the reported modest breakup fee of $1 billion – which is a far cry from the spectrum licenses $3 billion in cash AT&T had to hand over to T-Mobile when that deal fell through – seems to indicate Sprint knows the move is a gamble.

To gain approval, Sprint and T-Mobile will almost surely have to make some substantial concessions to appease regulators. And those concessions may change the landscape of the mobile industry in some substantial ways. Some of the most intriguing possibilities include:

  • The FCC has long demanded spectrum divestitures in exchange for approval of mobile telecom tie-ups in an effort to maintain a competitive balance, and the FCC’s recent revisions to its “spectrum screen” rules all but ensure Sprint will have to dump some of its holdings of 2.5 GHz airwaves. While there’s no telling how those holdings would be distributed, they could end up in the hands of Dish Network, which is sitting on its own pile of spectrum as it waits for an opening into the mobile market. And as my former colleague Mike Dano recently wrote, the spectrum screen could pave the way for a tie-up between Dish and Verizon Wireless.
  • Sprint Chairman and SoftBank CEO Masayoshi Son has promised to start a “massive price war” if the proposed merger goes through, and the increased scale should eventually lower the combined carrier’s costs. As the Motley Fool noted, SoftBank – which is the third-largest carrier in Japan – has promised to cut smartphone prices and offer more affordable voice and data plans. PCMag’s Sascha Segan called Son’s promise “bogus,” citing the difficulties and costs that are unavoidable when integrating two big businesses with very different nationwide networks. But Sprint has some financial flexibility now that the SoftBank takeover is finalized. If Son can find a way to convince regulators that he will aggressively take on AT&T and Verizon – and if regulators can find a way to hold him to it – U.S. consumers could benefit.
  • Perhaps the most interesting possibility is that regulators require Sprint and T-Mobile to take on a major partner, essentially maintaining a field of four major mobile network operators. MarketWatch’s Miriam Gottfried has written that Dish is a potential candidate in this scenario, which is certainly true, and Kevin Smithen of Macquerie Securities speculated last week that Amazon – which is reportedly preparing to launch its own smartphonemight make a good MVNO partner. Additionally, both Comcast and Google are looking to deliver disruptive wireless services primarily via Wi-Fi, and both will need a cellular partner to offer truly mobile services.

To be clear, a merger between Sprint and T-Mobile is still an extreme long shot, and I think if it were to go through it likely would negatively affect the U.S. market in some important ways. But the proposed deal will probably come before regulators in the coming months. Approval of the deal could change the industry landscape in ways far beyond simple carrier consolidation.