Monday June 26, 9:00 am Eastern Time
Individual Investor
Telecom: What Next for WorldCom and
Sprint?
By: Eliot Walsh (06/26/00)
The latest chapter in the drawn out drama over WorldCom's (NASDAQ:
WCOM - news) pending acquisition of Sprint (NYSE: FON - news)
continued to unfold last week, and analysts think an endgame to the
controversial, $148 billion merger is in sight.
A cascade of press reports from numerous sources said that in order to
clear regulatory hurdles from both the U.S. Department of Justice and the
European Competition Commissioner, WorldCom is prepared to sell all of Sprint's Internet and
long-distance operations, currently valued at $40 billion to $45 billion.
Neither company has officially confirmed the reports, which started surfacing Wednesday, but on both
Thursday and Friday, shares of WorldCom traded down while Sprint made gains.
WorldCom has indicated it would try to accommodate regulators with some major concessions in
order to acquire Sprint's fast-growing wireless business, which is considered the merger's crown jewel
and trades as the tracking stock Sprint PCS (NASDAQ: PCS - news).
WorldCom's management has made it clear that the wireless business is the whole point to doing the
deal, but it sought to subsidize the huge investment to make the wireless component work with revenue
garnered from Sprint's huge long-distance customer base.
WorldCom controls UUNet, one of the world's most expansive Internet backbone networks, as well
as a massive long-distance business. But until it proposed buying Sprint, the company lacked a
wireless component. Now, facing increased scrutiny both from Washington, D.C. and Europe, the
company is scrambling to find a way to emerge from the regulatory process with its deal intact.
On the U.S. side, the Justice Department is concerned that the joint company would control too great
a portion of the domestic long distance market, while EU regulators object to the large share of the
international Internet backbone business WorldCom would control following the merger.
WorldCom chief executive Bernie Ebbers has said he would call the deal off rather than divest the
UUNet business, but selling Sprint's fiber-optic data backbone is less of an obstacle.
The sentiment on Wall Street is that that the merger will close, although the increased regulatory
pressure has caused a number of analysts to hedge their bets on WorldCom's stock. In a report
published Friday, ABN Amro analyst Kevin Roe writes, ``Our stance on WCOM remains cautious
given the regulatory risk that remains, the potential for materially adverse merger conditions, and the
possible abandoning of synergies promised in the Sprint acquisition.'' Roe was not available for
comment.
However, he supports the proposition that WorldCom divest itself of Sprint's wireline business if
regulators demand so. ``This move appears to render moot the regulators' primary concerns of market
concentration, and centers discussions on their secondary concern with the eventual placement of the
Sprint business,'' he wrote.
But the prospect of a partial divestiture of Sprint assets raises the question: Who would the buyer be?
Within the investment community, the almost universal expectation is that Deutsche Telecom (NYSE:
DT - news) and France Telecom (NYSE: FTE - news) are the most likely bidders.
Baby Bells, particularly SBC Communications (NYSE: SBC - news), Bell Atlantic (NYSE: BEL -
news) or Bell South (NYSE: BLS - news), would all face greater regulatory restrictions surrounding the
aquistion of Sprint's remaining units. The regional Bells face a steep regulatory battle entering
long-distance in their own regions, or owning more than 10% of a carrier that does.
But, as PaineWebber analyst Eric Struminger points out in a recent research note, the Department of
Justice's recommendation that SBC's application to provide long-distance in Texas be approved is
``helpful to WorldCom's causes.''
Deutsche Telecom and France Telecom also have an advantage of being familiar with Sprint's
business, having partnered with the company in the defunct Global One joint venture.
``We see Deutsche Telecom and France Telecom as the most likely bidders for the FON business,
and we believe the regulatory hurdles of a cross-border vertical merger would be less than that of a
horizontal merger,'' wrote ABN Amro's Roe. ``We have heard reports that the regional Bell operating
companies are interested, and we would not eliminate any of them from a possible list of bidders.''
Finally, smaller, ``competitive'' telecom companies might be interested in Sprint's Internet business.
Level 3 Communications (NASDAQ: LVLT - news) and Global Crossing (NASDAQ: GLBX - news),
both of which are in the process of constructing their own nationwide optical networks, are at the top
of this list. Neither company would face the restrictions the Baby Bells would.
But what if the deal is called off? While analysts agree that some divestiture of assets is probable, a
total scuttling of the merger is unlikely. The generally agree that such a scenario would probably trigger
another flurry of mergers and acquisitions.
Contrary to some rumors that have been circulated, WorldCom probably would not try to acquire
either VoiceStream (NASDAQ: VSTR - news) or Nextel Communications (NASDAQ: NXTL - news)
. Either deal would be too dilutive to WorldCom shares, according to Struminger.
Interestingly enough, WorldCom itself could be in play if the deal fails completely. Who could be the
buyer? Deutsche Telecom and France Telecom are again at the head of line, but Vodafone AirTouch
(NYSE: VOD - news) is also a candidate.
Both Struminger and Roe maintain that while WorldCom is an attractive company-especially at its
recent price-the best way to play the merger's current uncertainty is to buy shares of Sprint, which if all
goes well, ultimately will translate into a position in voice-, data- and wireless-ready WorldCom. Just a
month ago, we wrote about the value in Sprint's existing franchise.
Bottom Line:
The WorldCom/Sprint deal is riding some rough antitrust rapids, and the result is anybody's guess.
But analysts caution against building a position in WorldCom at the moment. Instead, they recommend
that investors buy Sprint-and be ready for an interesting next few months. |
