Is T-Mobile Going to SoftBank's Kitty?

The long impending merger between Sprint Corp. S and T-Mobile U.S. Inc. TMUS, that had been doing the rounds in the market for almost a year now, is finally nearing completion. Sprint's parent company SoftBank Corp is in the final stage of negotiation with Germany's Deutsche Telekom AG to acquire a majority stake in T-Mobile.

Reportedly, Japanese telecom giant SoftBank plans to buy stake in excess of 50% in T-Mobile from Deutsche Telekom, which currently owns 67% of the latter. Tokyo-based SoftBank will use cash and stock swaps to fund the $16 billion (1.7 trillion yen) deal, thus valuing T-Mobile at around $32 billion.

The carrier has approached various large financial institutions and is seeking a bridge loan to keep the interest rate low. However, the news failed to excite shareholders of both Sprint and T-Mobile as the stocks ended in red on Monday trade on NYSE.

In July 2013, SoftBank had acquired a 78% stake in Sprint for $21.6 billion after gaining shareholders' approval and clearing all competition-related concerns expressed by the U.S. Federal Communications Commission (FCC). Notably, SoftBank made its way through, thwarting Dish Network Corp.'s DISH attempt to acquire Sprint by raising its earlier bid of $20.1 billion.

If successful, the transaction with T-Mobile U.S. will introduce fruitful synergies for SoftBank. Amalgamation of the two carriers will generate over 100 million customers and place SoftBank in a stronger position as compared to major operators such as Verizon Communications Inc. VZ and AT&T Inc. It will also give the Japanese carrier a shot in the arm, with a solid foothold in the world's largest economy.

However, a number of reasons force us to remain more sceptical than optimistic about the success of the deal. The deal is expected to face close scrutiny from both the Federal Communication Commission (FCC) and the U.S. Department of Justice (DOJ) on anti-competitive issues, which could stretch for a year.

The merger between Sprint and T-Mobile – the nation's third and fourth largest telecom operators – will definitely raise a few eyebrows as in 2011 the FCC had rejected AT&T's bid for T-Mobile U.S., stating that it wants four nationwide telecom operators to retain healthy competition. If Sprint successfully executes the transaction, this figure will come down to three.

Both Sprint and T-Mobile currently carry a Zacks Rank #2 (Buy).