Of course, this rumor doesn't stop there - it goes as far as to suggest that Retro Studios is actually deep into development on a Banjo and Kazooie title, and that the talks with Microsoft have been ongoing for some time."
This is why I don't believe this rumor. Why would Retro Studios have already started to work on a game for a series Nintendo doesn't own? What if negotiations broke down? That would be like if the Brooklyn Nets started making Dwight Howard jerseys back in June. This isn't like Pac-Man Vs. where Nintendo was experimenting with a concept with probably only a few programmers. And at least Namco was a 3rd party when Nintendo developed Pac-Man Vs. There aren't as many barriers.
If Rare and Nintendo got back together then think about what it would mean for the next Smash Brtohers game.
Probably nothing. The roster was probably finalized back in April/May. I suppose there could be DLC characters, but Katsuhiro Harada, who produces Tekken and is involved with the new Smash Bros. games, is not a fan, going as far as to say he would maybe quit than deal with paid DLC. It's not up to him since Sakurai is in charge. However, he might have enough influence to say, "F that noise." Unless Nintendo released it for free... what are the chances of that?