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MCI, Sprint talking deal
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September 24, 1999: 5:32 p.m. ET
Long-distance companies eye merger in wake of Vodafone-Bell Atlantic alliance
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NEW YORK (CNNfn) - MCI WorldCom Inc. and Sprint Corp. are in talks about a merger, industry sources said Friday, one that could blend the companies' relative strengths in high-growth Internet and mobile phone businesses.
Informal talks have been going on for some time, sources who asked not to be identified told Reuters, but gained urgency after Bell Atlantic (BEL) and Vodafone Airtouch Plc (VOD) forged a wireless telephone joint venture.
Terms of the talks were not immediately available, such as whether MCI WorldCom would offer a premium for Sprint, whose core wireline business and cellular subsidiary now are worth about $80 billion together. The deal would present a counterweight to leader AT&T (T).
"This kind of consolidation is unavoidable," said Ragu Gurumurthy, a telecom expert at consulting firm Booz-Allen & Hamilton, who said that a deal would help the partners face the crunch of lower pricing that has beset a crowded field of competitors.
A price war in long-distance business has squeezed profits across the industry. Many analysts predict that long-distance service eventually will be free, paid for as part of bundled telecommunications package that includes high-speed Internet, video and wireless services.
"We see three to five megacarriers globally in the next several years. Such a deal would give them both scale in terms of a critical mass of customers and scope of services -- wireless, local, long-distance and broadband," Gurumurthy said.
MCI WorldCom (WCOM), of Jackson, Miss., and Westwood, Kan.-based Sprint (FON) both declined to comment. MCI WorldCom shares fell 2-3/8 to 76-1/8 Friday, while Sprint rose 2-7/8 to 54.
Wall Street not surprised
Wall Street investment bankers have been buzzing in recent weeks about Sprint's openness to a buyout offer, and several said Friday they are not surprised about talks with MCI WorldCom. Sprint's CEO and Chairman William Esrey is seen as shareholder-friendly as a former investment banker at Dillon Read.
Obstacles remain and the talks could still unravel, the Wall Street Journal reported Friday, citing sources close to the negotiations. One concern, analysts said, is that a deal that involves No. 2 long-distance company MCI WorldCom and No. 3 Sprint would face severe regulatory scrutiny.
While the two companies have begun to find niches in the telecommunications business, the merger would pair two companies that have the same core business -- long-distance.
But several of their business lines would complement each other. MCI WorldCom's UUNet Internet backbone unit, which provides telecommunications for Internet service providers, is a high-growth business.
Sprint's PCS subsidiary is a top cellular communications provider -- with AT&T (T) among its leading rivals in that field. Wireless service is one hot segment MCI WorldCom has been seeking to tap; it tried and failed to strike a deal with the two-way radio and cellular phone company Nextel (NXTL) earlier this year.
Sprint PCS is on the cutting edge of providing Internet access to cell phone screens, and UUNet carries anywhere from 50 to 60 percent of all Internet traffic on its backbone, experts said.
"The combination would be phenomenal. MCI WorldCom has every global service offering of telecom service except for one -- wireless," said Jim Friedland, an analyst at Volpe Brown Whelan in San Francisco.
Wireless segment consolidating
Consolidation in the wireless phone segment has been rife. Aside from the Bell Atlantic-Vodafone pact, VoiceStream Wireless Corp. (VSTR) said Monday it will buy Aerial Communications Inc. (AERL) for $3.5 billion.
Graham Finney, a research director at the Yankee Group consulting firm, doubted the benefits to MCI WorldCom outside the cellular business. "It is difficult to see what else Sprint could bring to the deal," he said.
Meanwhile, antitrust issues would surely loom. When the Federal Communications Commission approved WorldCom's $40 billion buy of MCI a year ago, the agency said it would be hard to OK such long-distance mega-mergers in the future.
Finney said that a deal would clearly reduce competition in the long-distance business -- which is why it would attract intense regulatory scrutiny.
Other analysts disagreed, saying any duopoly of AT&T and a combined Sprint-MCI WorldCom would be short-lived. Upstarts such as Qwest Communications (QWST) or Level 3 Communications (LVLT) are already in the market and some regional Bells, such as Northeast giant Bell Atlantic (BEL), are awaiting clearance to offer long-distance service.
Gurumurthy and Friedland argued that a combined MCI WorldCom-Sprint would have only about 30 percent of the long-distance business, far behind AT&T's 60 percent share. A merged company would have $34 billion in annual sales and a market value of about $191 billion.
While analysts said job cuts would be an inevitable outcome, they'd mainly come on the administrative side, not in customer service. MCI WorldCom has been cost-conscious since it was itself born of a merger, with pre-tax profit margin now at about 35 percent - from just 22 percent prior to the merger of MCI and WorldCom.
Sprint alone is worth $44.4 billion -- while its wireless Sprint PCS (PCS) business, which it separated into a distinct tracking stock, is valued at $33 billion, based on Thursday's closing prices.
The merger talks could threaten the shaky GlobalOne alliance among Sprint, Germany's Deutsche Telekom (FDTE) and France Telecom (PFTE), analysts said.
-- from staff and wire reports
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