MCI & SPRINT>
September 24, 1999
MCI WorldCom, Sprint Ponder
A Merger as Talks Pick Up Speed
By REBECCA BLUMENSTEIN and STEVEN LIPIN
Staff Reporters of THE WALL STREET JOURNAL
MCI WorldCom Inc. and Sprint Corp. have been holding talks about a
merger that would combine the nation's second- and third-largest
long-distance carriers, though significant obstacles remain that could scuttle
a deal, according to people familiar with the matter.
Purchasing Sprint would finally bring MCI WorldCom, based in Clinton,
Miss., a nationwide wireless network and boost its heft as the global
telecommunications industry rapidly consolidates. The talks are continuing.
Sprint alone is valued at nearly $40 billion, and its
highly regarded wireless business, which it
separated into its distinct PCS tracking stock, is
valued at about $33 billion. But MCI WorldCom
has a far higher valuation: about $151 billion,
topping even market leader AT&T Corp.'s $140
billion valuation.
Though Sprint has held discussions with a handful
of telecommunications heavyweights, negotiations
with MCI WorldCom have picked up recently.
People familiar with the situation said that both
sides have discussed a financial structure for a deal
in which MCI WorldCom would acquire Sprint's core business for stock.
MCI WorldCom also would exchange Sprint's existing tracking stock for a
new WorldCom tracking stock. Under that structure, WorldCom's
earnings wouldn't be hurt by continued losses in the still-growing wireless
business, much like Sprint has isolated its core long-distance business on
its balance sheet.
That said, any deal for the main business of Sprint, outside observers said,
would likely use so-called purchase accounting, which could hurt reported
per-share results. But it wouldn't necessarily hurt so-called cash earnings
per share, a measurement that is increasingly being used by acquirers. MCI
WorldCom's chief executive, Bernard J. Ebbers, who built the company
through a string of 60 acquisitions, has repeatedly shunned deals that
would dilute earnings for his shareholders.
No deal is imminent, however, and the talks
could still falter. Earlier this year, MCI
WorldCom engaged in serious negotiations to
acquire Nextel Communications Inc., a pure wireless concern. Those
discussions fell apart over price.
MCI WorldCom and Sprint, based in Westwood, Kan., declined to
comment.
A deal between No. 2 long-distance firm MCI WorldCom and No. 3
Sprint would surely attract close scrutiny by regulators. Together, the
companies would hold about 30% of the U.S. consumer long-distance
market; AT&T holds about 60%.
Still, industry observers and one person familiar with the regulatory issues
said a combination probably wouldn't be blocked outright by regulators.
The companies would likely argue a merger wouldn't preclude competition
from others. Indeed, the nation's long-distance market has hundreds of
entrants and has been open to competition for more than a decade. And it
is widely expected that regional Bell operating companies will soon get
permission to enter the long-distance market as well.
Another possible stumbling block is the long-simmering dispute between
Sprint and its Global One partners, France Telecom SA and Deutsche
Telekom AG. But even though Sprint has struggled recently with the
venture, neither Deutsche Telekom nor France Telecom, which each own
10% of Sprint, could block a deal with MCI WorldCom, said people
familiar with the matter.
Deutsche Telecom has held talks about increasing its stake in Sprint or
buying the company outright, but the German phone company's interest has
waned in recent weeks. Indeed, under the current terms of Global One's
structure, neither Deutsche Telekom nor France Telecom has first rights of
refusal along with their Sprint stakes. If a potential merger partner would
arise, both companies would be treated like any other shareholder.
Sprint probably would need to shed its
Internet-backbone business as part of the deal,
because MCI WorldCom already has such a
business -- its UUNet division, which handles
Internet traffic for American Online Inc. and many
of the nation's largest Internet providers. When
WorldCom acquired MCI Communications Inc.
for over $40 billion in late 1997, it sold MCI's
Internet business to Britain's Cable & Wireless
PLC.
It was almost exactly two years ago, on Oct. 1,
1997, when Mr. Ebbers stunned the
telecommunications industry by launching the unsolicited bid for MCI. At
the time MCI had accepted an offer from British Telecommunications
PLC. Now it appears that Mr. Ebbers is ready for his next
mega-acquisition. And after earlier this year dismissing talk of an inevitable
sale of his company, some say William Esrey, Sprint's chairman, has
seemed to warm to the idea lately. Sprint is the only major long-distance
company that has stood on the sidelines during the recent wave of
telecommunications mergers.
Though Sprint has a fast-growing wireless unit and has generally delivered
solid financial results to its shareholders, it has been unable to boost its
10% share of the U.S. consumer long-distance market. A few weeks ago,
some Wall Street analysts voiced concerns over pricing pressure in the
company's core long-distance business.
Sprint had 1998 revenue of $17.13 billion and net income in its core
operations of $1.53 billion. The wireless unit has seen rapid growth and
now boasts more than four million subscribers, but it had a 1998 operating
loss of $2.39 billion, excluding a one-time charge.
Mr. Ebbers, meanwhile, has been increasingly under pressure to acquire a
wireless presence as the use of cellular phones explodes. But he has
maintained that MCI WorldCom's business hasn't been hurt by its lack of
wireless assets.
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