For an M&A deal that could yield big synergies but also faces big regulatory risks, any decision on whether or not to push ahead with merger talks comes down to a risk/reward calculation. Are the benefits of a deal strong enough, and the odds of it being approved high enough, to offset all the costs -- termination fees, distracted management, missed opportunities for other deals -- associated with a potential rejection?

Under the Trump Administration, T-Mobile US Inc. (TMUS) and Sprint Corp. (S) apparently feel the answer to that question, as it relates to a tie-up between the #3 and #4 U.S. mobile carriers, is "yes." But T-Mobile's risk/reward calculations are probably a lot different than Sprint's, given its much healthier financial and competitive position, and just because the risk of a rejection has dropped doesn't mean it's no longer significant.

On Tuesday morning, September 19, CNBC and Reuters both reported that T-Mobile and Sprint have resumed talks and were discussing an all-stock deal that (unsurprisingly) would give T-Mobile a majority stake in the combined company. Sources cautioned that any deal is still weeks away and isn't guaranteed to happen. CNBC added an exchange ratio for shares hasn't been agreed to yet.

Sprint shares rose 6.8% to $8.20 following the report, but remain down 3% on the year (compares with a 12% gain for the S&P 500) due to disappointing earnings reports and worries about aggressive promotional activity. T-Mobile shares rose 5.9% to $65.42, and are now up 14% on the year.

Reports about T-Mobile and Sprint being open to a deal have been around since February, and the companies are believed to have started talks in April, after an FCC spectrum auction that prevented discussions ended. Talks were reportedly halted in May as Sprint entered into a 2-month exclusive negotiating window with Comcast Corp. (CMCSA) and Charter Communications Inc. (CHTR) about a reseller deal that would involve the cable giants taking stakes in Sprint. While reporting on those talks in June, The Wall Street Journal reported Sprint and T-Mobile "remained far part" in discussions.

With Sprint's cable talks having apparently gone nowhere, it now looks like T-Mobile talks are underway again. But it's unclear just how serious the talks have gotten, and under what terms T-Mobile, for whom a deal with Sprint is far from necessary, would be willing to sign on the dotted line.

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Sprint had $32.8 billion in net debt as of June 30 and is forecast on average by analysts to have fiscal 2017 (ends in March 2018) free cash flow (FCF) of negative $596 million. And even that estimate might be too generous if Sprint can't put a lid on service revenue declines: Service revenue fell 7% annually in the June quarter to $6.07 billion, as postpaid and wholesale/affiliate account growth (enabled by aggressive pricing) was offset by prepaid sub declines and a $4.24 drop in postpaid average revenue per user (ARPU) to $47.30.

Sprint's big promotions did let it add 88,000 postpaid phone subs last quarter, but it lost 39,000 postpaid accounts overall. Analysts on average see the company adding 557,000 postpaid subs this fiscal year, raising its total base to 32.3 million, albeit with service revenue dropping 4% to $22.9 billion. Notably, in a year in which rivals have dialed back promotions related to Apple Inc.'s (AAPL) fall iPhone launches, Sprint is offering a free 18-month lease for a 64GB iPhone 8 to consumers who activate a new line of service and trade in an iPhone 7 or Galaxy S8. After the lease ends, customers can either trade in the phone or pay $175 over six months to own it outright.

T-Mobile had $28.3 billion in net debt of its own at the end of June, but its cash-flow profile looks much better. The company posted Q2 FCF to $482 million, and analysts on average expect a full-year total of $3.16 billion. Moreover, the company forecasts operating cash flow will grow at a 15% to 18% compound annual rate (CAGR) from 2016 to 2019, and FCF at a 45% to 48% CAGR.

Meanwhile, T-Mobile saw 817,000 branded postpaid subscriber adds in Q2, including 786,000 branded postpaid phone net adds. For the full year, it expects 3 million to 3.6 million branded postpaid net adds. And though T-Mobile's pricing remains aggressive relative to Verizon Communications Inc.'s (VZ) and AT&T Inc.'s (T) , service revenue was up 8% annually in Q2 to $7.4 billion, as subscribers grew and postpaid ARPU roughly held steady.

T-Mobile CEO John Legere.
T-Mobile CEO John Legere.

In spite of its momentum, Sprint might still be worth T-Mobile's while. The cost synergies a merger would deliver in terms of greater network scale, retail store closings and lower combined marketing and customer support spend would clearly be significant, and pairing Sprint's high-band spectrum assets with T-Mobile's high-band and (recently-acquired) low-band assets also wouldn't hurt.

And (as deal opponents are bound to point out), merging the two national carriers that have been the most aggressive with their pricing could lead to less all-around price pressure. Verizon and AT&T investors would no doubt celebrate the closing of a T-Mobile/Sprint deal.

But whereas a deal is an unequivocal positive for Sprint, T-Mobile has to balance the aforementioned benefits against potential pitfalls. The company has to worry about how the task of digesting a struggling Sprint could affect its recently-stellar execution, as well as about the costs of improving Sprint's oft-criticized network quality and customer support and shouldering a $60 billion combined net debt load. And since Sprint has been relying on rock-bottom pricing to keep its subscriber base from declining, there's some risk that getting rid of Sprint's plans could cause short-term subscriber losses.

Throw in the fact that a Sprint merger is by no means necessary to guarantee T-Mobile's future -- the opposite may very well be true for Sprint, unless a cable company or some other white knight arrives -- and the company has every reason to drive a hard bargain. Particularly since, even now, regulatory approval is far from a shoe-in.

To be fair, the climate does certainly look more M&A-friendly, as the FTC's approval of Walgreens' acquisition of Rite Aid (following fresh Walgreens concessions) highlights. And as Jim Cramer points out, the White House and Congress haven't been going out of their way to object to mega-deals such as United Technologies' recent $30 billion agreement to acquire Rockwell Collins.

That said, the FTC still has some bite left, as shown by its June blocking of a merger between daily fantasy sports leaders DraftKings and FanDuel. And a T-Mobile/Sprint mega-deal is more politically sensitive than some others, given its potential to impact the monthly phone bills of tens of millions of consumers. Moreover, the fact that average monthly wireless bills have been on a clear downswing as T-Mobile's share gains spark countermeasures from AT&T and Verizon could make consumers and politicians especially nervous about a deal.

As of the Sept. 19th close, T-Mobile had a $51.4 billion market cap and $79.7 billion enterprise value (market cap plus net debt), while Sprint had a $32.8 billion market cap and $65.6 billion enterprise value. Thus, if a deal was inked based on those valuations, T-Mobile shareholders would own 61% of the combined company, but the cost of a purchase would be equal to 82% of T-Mobile's enterprise value.

Look for T-Mobile to push for more favorable terms than that, perhaps much more favorable ones. In any talks, both time and leverage are very much on the side of John Legere's company.

Apple and Comcast are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL or CMCSA? Learn more now.

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