T-Mobile and Sprint Are 1 Step Closer to Merger Approval

Federal Communications Commission (FCC) chairman Ajit Pai said Monday that he's going to recommend the commissioners approve the proposed merger between T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S). After months of doubts that the two telecom companies would get an OK, this represents a major step toward the merger.

The merger still needs approval from a majority of FCC commissioners in a vote that's expected in the next few weeks. The bigger hurdle now is to get approval from the Department of Justice (DOJ).

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DOJ antitrust enforcement staff expressed concerns over the deal last month, but T-Mobile and Sprint have shown a willingness to make concessions to ease those concerns. In fact, the two companies agreed to commitments in order to sway Pai and the FCC.

Here's what investors need to know about the commitments and the status of the merger agreement.

Selling Boost Mobile

As part of its bid to gain FCC approval for the merger, T-Mobile and Sprint agreed to sell Boost Mobile, Sprint's prepaid brand. The new company -- currently being called New T-Mobile in filings -- will have 120 days to sell the prepaid-service provider following the close of the merger.

One of the biggest concerns with the wireless market moving from four major carriers to three is that low-income consumers could be left with fewer choices and higher prices. Selling off Boost Mobile will ensure competition remains stable among prepaid wireless service providers, which cater to low-income consumers or those with poor credit profiles. New T-Mobile would retain the Metro and Virgin Mobile brands.

Boost Mobile will likely still rely on the New T-Mobile network through a favorable mobile virtual network operator (MVNO) agreement that New T-Mobile said it will offer for the next six years. But Boost would be free to explore other options as well. If Boost stays on the network, it will have only a modest negative impact on the company's finances as the new company replaces prepaid customers with a wholesale agreement.

The network build-out timeline

As part of its appeal for approval, T-Mobile and Sprint committed to a rapid build-out of their 5G network. The network will cover 97% of the U.S. population within three years, and 99% of the population within six years -- 90% of customers will see peak speeds of at least 100 Mbps, while 99% will see speeds reach above 50 Mbps.

The two companies have complementary radio spectrum rights for building out a 5G-capable network. Management has touted its commitment to building out 5G, and the faster it can build out the network, the more competitive it'll be with other carriers.

Building out the network this fast might cost more than anticipated, but it's an investment worth making, especially if it's key to gaining approval. New T-Mobile has committed to spending $40 billion over three years to build out the network. That said, the company could face pressure on its cash flow, as it's also committed not to raise prices on its customers during the network build-out. As a result, all service-revenue growth will come from moving customers upmarket on existing plans or winning new subscribers.

In-home broadband commitments

New T-Mobile is also committing to cover a certain number of households with its planned in-home broadband service. T-Mobile started testing the service in select rural markets earlier this year, but it is committing to market the service to 9.6 million households within three years and 28 million within six years.

A key aspect to the home internet service plans is offering more options to rural Americans. To that end, T-Mobile is committing to 2.6 million and 5.6 million rural households within three years and six years, respectively. That's 300,000 more within three years than originally planned, and it's 400,000 more than New T-Mobile planned to cover within six years.

The company expects the presence of New T-Mobile in the home broadband market to benefit consumers, regardless of whether they use the service. T-Mobile plans to offer the service at a low price compared with existing competitors, which will put pressure on them to provide better service and lower prices themselves.

What's next

The FCC has about two weeks left on its self-imposed decision deadline, so investors should expect a vote shortly. With Pai's recommendation for approval and a Republican majority, it seems likely the merger will gain approval from the FCC.

It's still not clear, however, if T-Mobile and Sprint's commitments are enough to win approval from the DOJ. The sale of Boost Mobile should help ease antitrust concerns, and the commitments to build out a 5G network capable of providing in-home broadband service to millions of Americans ought to add another incentive to approve the deal.

Pai's recommendation is a major step for the two companies in their efforts to merge, but there are still a couple more hurdles to overcome before they can close. And not only does it need to gain approval, it then also has to execute on its promises to the government.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.