Sprint chief acknowledges merger may not be approved

Ted Sickinger

Wednesday, June 14, 2000 | 11:04 a.m.

KANSAS CITY, Mo. -- Sprint Corp. Chief Executive William T. Esrey acknowledged for the first time Tuesday that his company's proposed merger with WorldCom Inc. may not receive approval from antitrust regulators.

Speaking at Sprint's annual meeting, Esrey thanked shareholders for their support of the deal, but said a Department of Justice staff recommendation to block the merger "is being taken seriously by senior officials at the DOJ.

"We have had a number of high-level meetings with Justice Department officials in recent weeks, but it remains unclear if we will or will not get the necessary government clearances to implement the merger."

Esrey said a decision from the Justice Department could come in the next two weeks. If the department decides to fight the deal, it would file a lawsuit, either setting out conditions that could satisfy their concerns, or seeking to block it unconditionally.

After several months of company statements saying the deal was "on track for approval," Tuesday's statement by Esrey was the first public acknowledgement by either company that the deal could be derailed, either because regulators see no acceptable remedies to their concerns, or the remedies being discussed are unacceptable for the companies.

Westwood-based Sprint is the Kansas City area's largest private-sector employer, with nearly 20,000 employees here. It's also the dominant local phone company in Las Vegas.

Sprint's would-be partner in the proposed $129 billion merger remained mum on the deal's prospects Tuesday.

"We don't have any comment on Mr. Esrey's remarks," said Peter Lucht, a WorldCom spokesman.

Justice Department officials have refused to comment on specifics of the merger negotiations.

Besides the Justice Department, the merger requires approval from the Federal Communications Commission and the European Commission, which is scheduled to deliver its verdict before July 12.

All three regulatory bodies have expressed serious concerns that the merger would create too much concentration in the market for Internet connectivity and long-distance services.

Sprint and WorldCom have consistently stated that the only legitimate regulatory issue with their merger was the combination of their Internet assets. WorldCom's UUNet subsidiary is the largest Internet business in the world, while Sprint's is one of the four biggest.

The companies have offered to sell Sprint's Internet assets to pave the way for approval. Sprint already has carved its Internet business -- including network equipment, employees and customers -- into a separate subsidiary to make the sale easier.

Regulators may have problems with that scenario, however, based on past problems during the merger of MCI and WorldCom.

MCI was forced to sell its Internet business when merging with WorldCom in 1998. Cable & Wireless, the No. 2 phone company in the United Kingdom, paid $1.7 billion for the business, but later sued WorldCom for failing to transfer the necessary employees, contracts and back office support to run it. WorldCom settled the case in March for $200 million.

Esrey said Tuesday that he was confident that the companies could carry out the Sprint Internet transfer in an effective manner, but he reasserted that regulator's problems with long distance are unfounded.

The two companies have argued that the regional Bell operating companies are rapidly gaining market share where they've been allowed to offer long distance (New York and Connecticut), and that the combined company's long-distance market share was still less than AT&T's.

The companies also contend that no competitor has the power to unilaterally raise long-distance prices in today's intensely competitive market. That argument, however, may have been undercut last week when AT&T attempted to raise its basic long-distance rates by as much as 80 percent.

"You can raise prices," Esrey said Tuesday, "but it doesn't mean you're going to keep the business and that it's going to stick in the marketplace."

Esrey wouldn't comment on recent rumors that the companies would consider selling part of Sprint's long-distance business -- perhaps its consumer business -- to a competitor, or speculate whether that would be sufficient to satisfy regulators. Sprint's long-distance division employs 6,500 in the metropolitan area.

Analysts find a partial spin-off of long-distance assets unlikely given the difficulty of separating the switches, fiber, billing systems, customer service and other support functions for business and residential customers.

"I don't see how you could split (long distance) apart," said Jeanne Schaaf, an analyst with Forrester Research in Cambridge, Mass. "You would have to sell the whole thing."

In that case, regulators would be forcing what WorldCom chief executive Bernie Ebbers has wanted all along -- to buy the fast-growing Sprint PCS wireless business without taking on the rest of the company, said Scott Cleland, a regulatory analyst with Legg Mason Precursor Group.

But Cleland doubts that regulators would be assuaged even if Sprint is willing to sell its entire long-distance business.

"Justice would prefer a full-strength Sprint as a competitor to WorldCom," Cleland said. "They're looking at the two as close competitive substitutes. A Sprint without wireless is not nearly as strong a competitor to WorldCom as it would be with it."

The sale of Sprint's long-distance business would significantly alter the economic underpinnings of the deal. The companies, for example, hope to generate $15 billion in savings over four years from combining their long-distance businesses.

Sprint's long-distance business generated $10.5 billion in revenues last year and is worth as much as $29 billion, according to calculations the companies prepared in their merger negotiations. But analysts noted that value is an estimate.

"The problem is promising something to the regulators and not having any idea what price you could get for it when you sell it," said Mel Marten, an analyst with Edward Jones in St. Louis. "If Deutsche Telekom is willing to open its checkbook and buy it for a good price, WorldCom would walk away happy. But that's a lot of uncertainty to agree to upfront."

Some observers think it might be time for the companies to revisit their original assumptions about the deal and start over, with WorldCom negotiating to become a reseller of Sprint PCS service.

"Sprint is a great little company," said Schaaf at Forrester. "It does a lot of innovative things and is a good company going forward. It doesn't need WorldCom, and WorldCom doesn't need all that stuff to buy PCS."

But Sprint still needs a partner of some sort. Sprint lacks international reach and is hoping to combine its fixed wireless assets with WorldCom's to provide consumers and businesses with an alternative to cable and local telephone connections.

Esrey said Tuesday that the WorldCom//Sprint merger was still the best way to prevent the regional Bells and AT&T-cable combinations from controlling the country's communications infrastructure, "calling it a once-in-a-lifetime opportunity."

"However," he said, "if we are prevented from merging the two companies, I firmly believe, and have stated many times before, that Sprint possesses the wireline and wireless assets, brand and employees to be highly successful in the future."

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