WASHINGTON The Justice Department is moving closer to approving T-Mobiles $26 billion merger with Sprint, but only if the companies sell multiple assets to create a new wireless competitor, according to three people familiar with the plan.
If such an arrangement is approved, it could weaken an effort by attorneys general from nine states and the District of Columbia to halt the blockbuster deal with a suit that they filed this week.
The department is pushing T-Mobile and Sprint to sell a prepaid mobile service and valuable radio frequencies that carry data to wireless devices, the people said. The companies have approached three internet and television providers Dish Network, Charter and Altice about buying Boost Mobile, a prepaid service owned by Sprint, and airwaves owned by Sprint, one of the people said.
A settlement between the companies and federal regulators could be completed in the next week, the three people said.
The possible agreement is the latest wrinkle in a merger that would reshape the wireless industry. The combined companies would have more than 127 million customers large enough to challenge Verizon and AT&T, the industry leaders.
Federal regulators have been reviewing the merger for more than a year, and have appeared to be getting close to approving it. But the lawsuit by the state attorneys general, all Democrats, added a new roadblock.
If Sprint and T-Mobile win Justice Department approval by selling those assets, the attorneys general might have to reconsider the basis of their suit. The states, led by New York and California, say the merger would lead to higher prices for consumers because it would reduce the number of major carriers to three.
The states have a very strong case unless the Justice Department comes up with a solution that would truly preserve a strong fourth competitor in the market, said Gene Kimmelman, a former senior antitrust official at the Justice Department. The stronger the fourth player, the more difficult it becomes to litigate successfully.
A spokesman for the Justice Department, Jeremy Edwards, declined to comment. Representatives for Sprint and T-Mobile also declined to comment.
The talks with Dish Network, Charter and Altice were reported this week by Bloomberg News.
Executives at Sprint and T-Mobile argue that the companies need to merge to compete with their bigger rivals, and to afford investments in the next generation of wireless technology, known as 5G.
The companies have tried to merge three times in the last five years. Two years ago, they failed to agree on terms. A deal announced in 2014 was abandoned when federal regulators voiced concerns that it could hurt consumers. T-Mobile, in particular, has pushed the entire industry to offer lower prices, shorter contracts terms and fewer restrictions.
The deal requires approval by both the Justice Department, which enforces antitrust law, and the Federal Communications Commission, which oversees the telecommunications industry.
Ajit Pai, the chairman of the F.C.C., signaled his support last month. He said the support was based on the companies commitment to invest in rural broadband service and 5G technology. The companies also committed to selling off Boost Mobile.
Letitia James, the attorney general of New York, said this week that the aim of the states lawsuit was to stop the merger in its tracks. The states argued in their complaint that the merger would cost Sprint and T-Mobile subscribers at least $4.5 billion a year.
Xavier Becerra, the attorney general of California, said the states intended to seek a preliminary injunction. If that happened, Sprint and T-Mobile would first have to resolve the lawsuit from the states, even if the Justice Department approved the deal.
But the case could run into trouble because it doesnt take into account the selling of both Boost and the wireless frequencies to another company, analysts said.
The states would have to evaluate whether they believe in light of that divestiture their arguments about harm are still valid, said Blair Levin, an analyst at New Street Research. We are in uncharted territory.
A representative for Ms. James did not immediately respond to a request for comment. Mr. Becerras office declined to comment. Colorado, Connecticut, the District of Columbia, Maryland, Michigan, Mississippi, Virginia and Wisconsin joined California and New York in filing the lawsuit.
The Trump administration has declared the development of 5G a matter of national security. The technology will provide much faster wireless speeds, aiding in the development of robotics, driverless cars and other emerging industries. The president has argued that if China leads in the development of 5G, the competitiveness of the United States economy will be hurt.
Makan Delrahim, whom Mr. Trump appointed as the Justice Departments top antitrust regulator, has reviewed numerous deals in the media and telecommunications industries in the last couple of years. He sued to block a deal between AT&T and Time Warner, but lost the case in court. He quickly approved the purchase of 21st Century Fox by the Walt Disney Company.
Before Mr. Delrahim took office, his comments were largely in line with more free-market-oriented Republican views, and he was widely expected to be more lenient on mergers than predecessors in the Obama administration.
But as in the case with the AT&T-Time Warner deal, he has pushed for structural remedies, like forcing a company to sell assets before approving a merger. He is skeptical of so-called behavioral remedies, which restrict the new companys behavior or operations.
In telecommunications, as in other industries, we strongly favor structural remedies. If a structural remedy isnt available, then, except in the rarest of circumstances, we will seek to block an illegal merger, Mr. Delrahim said in a speech in November.