Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) still need federal approval to merge, and there's no guarantee they'll get it.

When they first agreed on a deal, the two telecom giants highlighted its potential benefits to consumers. Now, with the Federal Communications Commission (FCC) having paused the clock on its review of the merger, Sprint has decided to shift the focus of the conversation a bit, and it's asserting to the regulator that the company faces dim prospects if the deal gets denied.

"Despite achieving substantial cost reductions and stabilizing its financial position, Sprint has not been able to turn the corner with respect to its core business challenges," the company wrote in a recent FCC filing. It also said that it has "tried a more localized approach in an attempt to drive growth, but continues to face declining subscribers and revenue."

Basically, Sprint wants the FCC to understand that if it can't partner with T-Mobile, it may not survive. That's a bleak assessment -- and it's clearly a negotiating maneuver -- but it's also hard to argue with the premise.

T-Mobile CEO John Legere and Sprint Chairman Marcello Claure

T-Mobile CEO John Legere and Sprint Chairman Marcello Claure held a joint media event when the deal was announced. Image source: T-Mobile.

How bad is it for Sprint?

Sprint CEO Michael Combes tried to paint a more positive picture of his company's efforts in its fiscal first-quarter earnings release on Aug. 1.

"By balancing growth and profitability, we were able to grow wireless service revenue sequentially, continue to add retail phone customers, generate net income for the third consecutive quarter, and improve the network," he said. 

The company has been able to grow by carefully managing expenses, making a lot of cuts, and attracting new subscribers with low-price deals. That's not how Combes sold things in the earnings call, but despite the good news, there's a lot to be worried about.

Sprint did make money in 2017 for the first time in 11 years, but the company has net debt of $32 billion. That will make investing in network improvements problematic, which the company pointed out in the FCC filing.

"Sprint's LTE Network footprint covers a much smaller geography," it wrote, and also admitted that its poor network experience is "a leading cause of Sprint's subscriber churn."

That's a major confession for the company, which built its current ad campaign around the idea that its network isn't the best, but it's good enough. Now, Sprint is saying that its network isn't good enough to compete, that it can't afford to improve it, and that it faces further subscriber losses and potentially insolvency as a result.

Sprint did acknowledge that cost-cuts, to the tune of about $10 billion  annually, have helped keep it afloat, and even brought it to near-term profitability. That strategy, however, is reaching its limits; the company doesn't expect to be able to find further significant ways to trim the fat.

Does this mean the merger should be permitted?

Sprint's argument that it won't survive on its own is made more compelling by the fact that the company has been in play for years, and has had numerous discussions with other potential acquirers that have not borne fruit.

There may be no path the FCC could choose that leaves Sprint viable as an independent fourth carrier. The company will likely fold on its own, and if it does, it's unclear what would become of its infrastructure. Its combination of assets and debts hasn't proven particularly interesting to the cable companies that have kicked the tires previously.

That really leaves the agency two choices -- approve the merger or let Sprint go bankrupt in the hope its assets get purchased by a company willing to operate the brand. The second approach seems foolhardy, which strengthens the case for the merger.

Sprint may be using some scare tactics to get what it wants, but nothing it's saying isn't true. It can't compete on its own, and T-Mobile is the only potential buyer at the table.

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