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Will Gov't Allow Sprint to Take Over T-Mobile?

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Sprint Corporation’s (S - Free Report) possible takeover of the fourth largest U.S. telecom player – T-Mobile US, Inc. (TMUS - Free Report) – is the talk of the town. But Sprint’s ambitious plan has raised a few eyebrows in the U.S. telecom industry regulatory body, forcing this powerful player to take a backward step in its buyout plan.

According to the Wall Street Journal, antitrust officials at the U.S. Department of Justice have shown their contempt toward the T-Mobile and Sprint merger in a meeting with Sprint Chairman Masayoshi Son, and CEO Daniel R. Hesse.

An unfavourable reaction by the regulators cast a bad spell on Sprint, as its share price dropped 2.4% to close at $8.65 on Wednesday trade on Nasdaq.

After a failed acquisition attempt by AT&T, Inc. (T - Free Report) , this is the second attempt for T-Mobile to find a prospective buyer. If the deal goes through, the U.S. telecom market will most likely see radical changes in power play among behemoths like AT&T, Verizon Communications Inc. (VZ - Free Report) and Sprint.

However, the question is whether the government will support consolidation in a highly saturated U.S. telecom industry as this would bring small players under the umbrella of big names or secure competitiveness in the market that benefits the end users.

With respect to the Sprint/T-Mobile prospective merger, regulators are apparently focusing more on maintaining a healthy competitive spirit in the market. Reportedly, they have argued on the negative impact that the deal could bring on market competition and unanimously agree to four nationwide carriers to balance out the industry. Notably, in 2011, the Federal Communications Commission (FCC) had rejected AT&T’s bid for T-Mobile U.S., stating the same reason.

However, Sprint has reportedly argued that the top players like AT&T and Verizon already control two-third of the telecom industry and its chance of giving competitive support to the industry remains low by standing solo.

For Sprint, the merger with T-Mobile U.S. will lead to over 100 million customers and place its parent company, SoftBank in a much stronger position as opposed to major carriers such as Verizon and AT&T. The new entity will also be the second largest carrier in the world in terms of revenues, surpassing global giant Vodafone (VOD - Free Report) . It will also give the Japanese carrier, Softbank a shot in the arm, with a solid foothold in the world’s largest economy.

However, skepticism on the part of regulators is the biggest hurdle that Sprint needs to overcome in the coming days.

Softbank is still in negotiation with T-Mobile owner Deutsche Telekom AG to resolve obstacles pertaining to this deal before reaching a definitive agreement. An official review by the antitrust department, which will decide the fate of Sprint and T-Mobile, is also due. Until then, we expect the negative sentiment caused by the recent opinion of antitrust officials to continue surrounding Sprint and T-Mobile affect their market value.

Currently, Sprint and T-Mobile, both have a Zacks Rank #3 (Hold).

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