UPDATE 1-Potential Sprint/T-Mobile deal may prompt U.S. auction rethink
* Planned spectrum auction rules could crimp big carriers
* Proposed deal would merge Nos. 3-4 U.S. wireless carriers
* A tie-up would reshape wireless sector (New throughout, adds closing share price, background on possible merger)
WASHINGTON, April 17 (Reuters) - A possible merger between Sprint Corp and T-Mobile US Inc could prompt U.S. regulators to rewrite rules they are now weighing for a 2015 auction of airwaves, according to sources familiar with the proposed regulations.
Sprint's parent company has been exploring a possible tie-up with T-Mobile, although no proposal has been announced. Federal Communications Commission Chairman Tom Wheeler has proposed restrictions on how much the biggest carriers, Verizon Communications Inc and AT&T Inc, could bid in the major auction of television spectrum scheduled for mid-2015.
The auction offers carriers a chance to buy access to airwaves that are valued for their strength and reach.
Wheeler's proposal has yet to be formally circulated among other FCC commissioners but would reserve up to 30 megahertz of spectrum in each market for carriers who do not already dominate the lower frequencies there - in most cases, Verizon and AT&T.
However, as in many other proceedings, the FCC's rules would be based on the "current market structure." Any changes or proposed changes in that structure that could undermine the goals of the auction would prompt a review and potential edits, said sources briefed on the proposed rules.
That means if Japan's SoftBank Corp, Sprint's parent company, forges ahead with its goal of merging the No. 3 wireless carrier with No. 4 provider T-Mobile, the FCC could eliminate the reserve set off for smaller competitors, sources said.
Some regulators, including Wheeler, have been skeptical of a potential merger because it would reduce the number of major U.S. wireless carriers to three from four. SoftBank CEO Masayoshi Son has argued that a stronger third player would create more competition for AT&T and Verizon.
FCC commissioners will review the draft rules in coming weeks and are expected to propose them on May 15. Bigger competitors have pushed back against bidding restrictions and AT&T on Wednesday threatened to boycott the auction if the rules are adopted as proposed.
U.S. regulators have expressed skepticism about the proposed Sprint/T-Mobile deal, but SoftBank CEO Masayoshi Son has made no secret of his goal to acquire the smaller carrier to become a stronger force in the United States and ultimately build the world's biggest mobile-related corporation.
It is unclear how active Sprint plans to be in the 2015 auction, particularly if the FCC were to reconsider how it may calculate Sprint's spectrum holdings in evaluating any new spectrum acquisitions.
The FCC reviews purchases of airwaves if the buyer acquires more than one-third of spectrum deemed suitable for wireless service in that area. In the past, large chunks of Sprint's higher-frequency airwaves were considered unfit for wireless.
The proposed changes would expand the scope of what spectrum is deemed fit for wireless, affecting particularly the holdings of Sprint and satellite provider Dish Network Corp.
Some analysts have said the expanded "spectrum screen" may force Sprint to divest some of its airwaves if it merges with T-Mobile or buys a lot in the auction.
However, that "spectrum screen" is flexible and does not mean the FCC would necessarily reject any deals that exceed the one-third threshold. And supporters of the merger have argued that if the FCC determines the Sprint-T-Mobile deal is in the public interest, the agency would be unlikely to force divestitures of the very spectrum that would make the merged company a stronger competitor to AT&T and Verizon.