If T-Mobile USA Inc. (TMUS) and Sprint Corp. (S) can finally consummate their long-running, off-and-on deal talks, the carriers' vast wireless spectrum holdings could enable the carriers to continue their bruising price competition and possibly to win over regulators.
The carriers have been linked in talks for years. Buzz about a merger resumed Tuesday after German publication Handelsblatt reported that T-Mobile parent Deutsche Telekom AG is leaning towards a merger with Sprint.
Sprint gained 1% to $8.22 at Wednesday's close, while T-Mobile fell 0.6% to $63.59.
"A lot of people in the market think that consolidation would lead to pricing power and rising prices in the industry and I don't' think that's the case," Moody's Investment Services analyst Mark Stodden said.
T-Mobile CEO John Legere has been a driving force behind unlimited plans and aggressive pricing that have been shaking up the telecom market.
Sprint and T-Mobile together would have by far the largest wireless spectrum portfolio, giving Legere more wireless capacity -- and thus more ammunition to continue his price war. With a greater supply of spectrum than its rivals, the post-merger company would be able to offer data plans more cheaply. For Verizon, which has comparably limited spectrum, offering an unlimited plan was a difficult choice.
Sprint alone has 200 MHz of spectrum, the most of any carrier, and T-Mobile has more than 100 MHz, according to Moody's.
Editors' pick: Originally published June 20.
Together, Sprint and T-Mobile would roughly double the spectrum of their rivals. While not all spectrum bands have equal propagation characteristics and regulators could force some divestitures, the carriers could continue to dog AT&T and Verizon with inexpensive unlimited data offers.
"By combining all of that spectrum capacity the merged company would have a very strong incentive to continue to disrupt on price because in the long term they will have a cost advantage," Stodden said.
A merger of Sprint and T-Mobile has been the investment thesis for Softbank Corp. (SFTBY) founder and CEO Masayoshi Son ever since his company invested $21.6 billion for a controlling stake in Sprint in 2013. The Obama administration pushed back against the deal, however, effectively squelching talks.
Trump's election re-opened the possibility of a Sprint and T-Mobile merger, and Son was one of the first to congratulate the new president. The Sprint chairman pledged to invest $50 billion and create 50,000 new jobs in the U.S. after a meeting with Trump in December.
Even with Trump in the Oval Office, though, it's not a given that regulators would sign off on a merger.
Some kind of a pledge to continue battling with AT&T and Verizon could help the carriers appeal to regulators, Stodden suggested.
"To get a deal done, [the regulatory argument is] basically predicated on some type of mechanism or commitment to continue to price aggressively," Stodden said. "I don't think there's an opportunity for them to merge and then start raising prices."
Because Sprint and T-Mobile would have so much more bandwidth than AT&T and Verizon, they could offer unlimited data at aggressive prices.
"Maybe they do have a path to appease the regulator, because they have this capacity advantage over the other guys," Stodden said.