A Year Ago: MCI WorldCom, Sprint talking merger

First published: Fri, 24 Sep 1999 16:38:04 GMT

MCI WorldCom and Sprint have been discussing a mega-merger, but big obstacles still exist.

MCI WorldCom and Sprint have been holding talks about a merger that would combine the US' 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 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 $40bn (£25bn), and its highly regarded wireless business, which it separated into its distinct PCS tracking stock, is valued at about $33bn. But MCI WorldCom has a far higher valuation: about $151bn, topping even market leader AT&T's $140bn 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, a pure wireless concern. Those discussions fell apart over price.

MCI WorldCom and Sprint 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 percent of the US consumer long-distance market; AT&T holds about 60 percent. 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 and Deutsche Telekom. But even though Sprint has struggled recently with the venture, neither Deutsche Telekom nor France Telecom, which each own ten percent 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 and many of the nation's largest Internet providers. When WorldCom acquired MCI Communications for over $40bn in late 1997, it sold MCI's Internet business to Britain's Cable & Wireless.

It was almost exactly two years ago, on 1 October, 1997, when Ebbers stunned the telecommunications industry by launching the unsolicited bid for MCI. At the time MCI had accepted an offer from British Telecommunications. Now it appears that 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 US 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 percent share of the US 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 $17.13bn and net income in its core operations of $1.53bn. The wireless unit has seen rapid growth and now boasts more than four million subscribers, but it had a 1998 operating loss of $2.39bn, excluding a one-time charge. 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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