G* worth $7B and Spring $115B. MCI WorldCom to Buy Sprint In Record $115 Billion Takeover
Sweetened Merger Offer Blocks
Last-Gasp Attempt by BellSouth
By STEVEN LIPIN, NICOLE HARRIS and REBECCA BLUMENSTEIN
Staff Reporters of THE WALL STREET JOURNAL
MCI WorldCom Inc. reached an agreement to acquire Sprint Corp. for a
record $115 billion in stock, the largest takeover in history.
The pact was reached after the upstart Mississippi telecommunications
company sweetened its bid, beating back a last-gasp attempt by BellSouth
Corp., according to people familiar with the matter.
BellSouth Monday modestly improved its offer for Sprint, but it was
bested by MCI WorldCom's sheer size and willingness to step up to the
plate with a significantly improved bid. Once again, Bernard J. Ebbers,
MCI WorldCom's deal-making chief executive, shook up the telecom
industry with a blockbuster deal by using his highflying stock price. William
Esrey, Sprint's chairman and chief executive, is expected to be chairman of
the combined MCI WorldCom-Sprint.
The deal, announced Tuesday, brings together
the nation's second- and third-largest
long-distance carriers, with estimated revenue
of about $50 billion. The two companies
would have 30% of the consumer
long-distance market, with more than 30
million long-distance customers and a global
reach from the U.S. to Europe and Asia. The combination would create a
company with a stock-market value of $200 billion or more, making it the
biggest telecommunications company in the world when its wireless assets
are included.
The transaction, including the acquisition of Sprint's main phone business
and its PCS wireless business, is valued at $76 a Sprint share, so long as
the stock stays between $62.15 and $80.85. MCI WorldCom will issue
between 0.94 and 1.2228 shares of MCI WorldCom for each Sprint
share. In addition, holders of the PCS shares -- which trade as a so-called
tracking stock -- will receive tracking stock in MCI WorldCom plus
0.1547 share of MCI WorldCom. MCI WorldCom will also assume $14
billion in debt and preferred stock.
MCI WorldCom's willingness to pay such a price for Sprint reflects both
the desire to get bigger in long distance as well as its changing view of the
need for a wireless business. Until now, Mr. Ebbers had said he didn't feel
the need to own a wireless network. But with the use of wireless phone
service skyrocketing to the point where users now outnumber cable
subscribers, the pressure was growing on WorldCom buy its way into the
market. Earlier this year, WorldCom had held unsuccessful talks to acquire
Nextel Communications Inc., a nationwide wireless provider.
Sprint's Suitor
Here's a look at the ups and downs of the combined Sprint and MCI WorldCom:
Strengths
MCI WorldCom gets a long-awaited nationwide wireless network
Creates a formidable No. 2 competitor to AT&T
Gives MCI WorldCom the scale to emerge as a dominant global
player
Weakness
May have to sell Sprint's Internet backbone to win regulatory
approval
MCI WorldCom moved aggressively after it became clear to that camp
that BellSouth could pay as much as $77 a share. The higher MCI
WorldCom bid makes the purchase dilutive to cash earnings per share. But
MCI WorldCom will tell Wall Street that if its stock recovers to more than
$80 a share, it will have to pay only about 5% more in stock than its first
offer of a fixed ratio of 0.89 share of MCI WorldCom for each Sprint
share.
MCI WorldCom said the deal is expected to be "essentially non-dilutive"
to cash earnings per share. Cash earnings, which is being used by acquirers
more frequently, excludes goodwill charges that must be deducted from
reported earnings.
Throughout the weeks-long courtship, the code name for Sprint was
Snow, and MCI WorldCom was dubbed White. Thus, the deal became
Project Snow White. And when BellSouth jumped in at the last minute, the
Atlanta-based company became Project Blue.
After news broke Monday that a deal was imminent, shares of Sprint
jumped to $60.875, up $3.875 in composite New York Stock Exchange
trading Monday, while MCI WorldCom climbed $1.125 to $71.625 on
the Nasdaq Stock Market. BellSouth fell to $42.6875, down $2.6875 on
the Big Board, while Sprint's PCS business climbed to $78.6875, up
$3.1875.
Many investors said Monday they thought MCI WorldCom was the
preferred buyer. Indeed, when it appeared that MCI WorldCom would be
paying less than BellSouth, investors appeared to be backing an MCI
WorldCom-Sprint deal because of the synergies and a perceived quicker
regulatory process. Of course, until the deal is closed, other bidders could
emerge.
"The better combination is Sprint and WorldCom," Ophelia Barsketis, a
telecommunications-fund manager at Stein Roe & Farnham in Chicago,
said. "It's an easier 'do' on the regulatory front. Besides, this will be a large
transaction, and BellSouth has never swallowed a fish this big."
Brian Hayward, a portfolio manager at Invesco Telecommunications Fund,
which owns all three stocks, suggested WorldCom-Sprint is a better fit.
"Quibbling about a few dollars here and there right now, vs. what fits
together long term, isn't the key issue," he said.
Any deal would have to win both Justice Department and Federal
Communications Commission approval.
BellSouth "clearly would face the bigger regulatory hurdle," Robert Litan, a
former Justice Department antitrust official now at the Brookings Institution
in Washington, said. "Sprint's management could defend merging with
MCI, despite the lower price, because of the legal limbo the BellSouth
offer would be in."
A Sprint deal would cap a phenomenal run by MCI WorldCom's Mr.
Ebbers. The onetime basketball coach and motel operator had cobbled
together one of the biggest phone concerns in the U.S., using a
high-powered stock and ability to extract cost savings from a string of
more than 60 acquisitions.
Nearly two years ago to the day, Mr. Ebbers, 58 years old, launched his
bold bid for MCI Communications, wresting control from British
Telecommunications PLC and ultimately winning what was at the time the
biggest-ever merger battle. Now, Mr. Ebbers appeared close to snagging
a prized possession from a company that traces its roots to the dawn of the
industrial age. "It would be the largest of any telephone company in the
world," Eric Strumingher, an analyst with PaineWebber Inc., said. "It's the
most attractive set of assets that any carrier has."
During the MCI battle in the fall of 1997, the then-little-known WorldCom
snatched the asset before the rival bidder had time to make a full
counteroffer. This time around, MCI WorldCom used the same team of
advisers of Salomon Smith Barney Inc., a unit of Citigroup Inc., and
Cravath, Swaine & Moore. Sprint was advised by Warburg Dillon Read
LLC, the investment bank where Mr. Esrey once worked, and lawyers
King & Spalding. Warburg Dillon Read is a unit of UBS AG.
After news broke that MCI WorldCom was in talks to acquire Sprint,
BellSouth kicked into high gear. Ultimately, it put together a $72-a-share
offer in cash and stock for the main Sprint business. Monday, it boosted
the value of the offer for the PCS business to $11 in cash per PCS share
from $7.25 a share in its initial offer, according to people familiar with the
matter.
In addition, BellSouth asked Sprint to waive the standstill agreement that
prevents Sprint shareholders France Telecom SA and Deutsche Telekom
AG from speaking with would-be bidders. But that was rejected, leaving
BellSouth unable to fully discuss how it could work with France Telecom
and Deutsche Telekom, which each own 10% of Sprint.
The pursuit of Sprint reflects a series of deals transforming the
telecommunications industry. Last month, Bell Atlantic Corp. agreed to
merge its wireless assets with rival Vodafone AirTouch PLC in a bid to
create a national wireless carrier. This summer, Qwest Communications
International Inc., an upstart long-distance company, won a bidding war to
acquire U S West Inc., the smallest of the Baby Bells. Simultaneously,
AT&T Corp., the nation's largest long-distance company, made a much
different bet by grabbing two of the nation's cable companies in hopes of
selling their customers local phone service.
Today the phone industry -- once the biggest monopoly in U.S. history --
is evolving into an oligopoly consisting of three or four huge carriers. They
intend to offer a panoply of long-distance, local, Internet and wireless
services to consumers and businesses.
Even before MCI WorldCom sweetened its offer, Sprint clearly positioned
the MCI WorldCom deal as better in the long run than the BellSouth offer.
A 68-page presentation drafted by Sprint's bankers at Warburg Dillon
Read for Sprint's board predicted annual pretax synergies of $2.038 billion
in 2001, $2.547 billion in 2002, more than $3 billion in 2003 and $3.6
billion in 2004. By comparison, the presentation for the BellSouth bid,
which ran 20 pages, said the annual pretax cost savings were $1 billion in
2001 and $1.6 billion in the following three years.
Analysts agreed that BellSouth could come away hurt from its failed
last-minute bid. Some said that BellSouth should have used its
considerable resources to come out with a bid that soundly trumped MCI
WorldCom's.
--John R. Wilke and Kathy Chen contributed to this article. |
