Sprint (NYSE:S) has been counting on its merger with T-Mobile (NASDAQ:TMUS) being approved by federal regulators. The struggling wireless carrier has told the Federal Communications Commission (FCC) that it may not be able to survive if the deal does not get approved.
The No. 4 wireless carrier filed documents with the federal agency that painted a bleak picture, according to a report Thursday from The Wall Street Journal. The document made it clear that Sprint's recent subscriber gains were more smoke and mirrors than actual new customers signing up.
"Sprint is in a very difficult situation that is only getting worse," the filing said. "Sprint is not on a sustainable competitive path."
What has gone wrong?
Since Sprint and T-Mobile agreed to merge back in April 2018, there have been questions as to whether federal regulators would approve the deal. The argument against the merger is that it makes the market less competitive. That's true to a point, because Sprint often has the lowest prices of any of the top-tier carriers.
To paint a better merger picture for regulators, the company adding phone lines, but not in a lucrative way. Most of the company's "gains" came from free lines given to existing customers, and it has acknowledged in the FCC filing that its quarterly reports have put a positive spin on what are really negative results.
"While these public statements and the individual metrics cited are all accurate, they are incomplete," according to the filing.
Basically, Sprint is saying that if the merger does not get approved it will probably go out of business anyway. That would leave the market with only three players, and it would leave T-Mobile weakened.
The biggest argument for a merger is that it would give T-Mobile resources and a customer count equal to those of industry leaders Verizon (NYSE:VZ) and AT&T (NYSE:T). That would allow the fast-growing No. 3 carrier to deploy 5G (a new, faster data connection protocol) on pace, or even faster, than the top two carriers.
How bad is Sprint's situation?
Sprint has become a brand without an identity. T-Mobile positioned itself as the true alternative to AT&T and Verizon. This left Sprint as a sort of also-ran, a company that can only win customers by more or less giving its service away.
If the T-Mobile deal falls through, it makes little sense for Sprint to continue operating. It would not have the cash flow to self fund its ongoing capital needs, either to maintain its current network or add 5G networking. In addition, the company appears to have limited partner or merger opportunities outside of T-Mobile. It was already rejected by the major cable players, which would logically want a foothold in the wireless space.
It's hard to know how bad Sprint's prospects actually are. The company has generally painted a positive picture in its earnings reports, at least when it comes to subscriber counts. There is an incentive for the company to paint a bleaker picture now, as that may sway regulators to allow the merger to happen.
The reality is that even with the most positive view of Sprint's recent earnings reports, the company has not been in great shape. It's hard to hold onto customers when all you have to offer is low prices.
Sprint needs a merger with T-Mobile, and that may not happen. If it doesn't, the best case scenario is a quickie sale to Comcast or Charter Communications at fire-sale prices. There's a lot of risk here -- enough to make investors very wary of this stock. The upside of an approval does not outweigh the risk of the deal not going through.