Business News - WorldCom/Sprint Deal Dies

Posted: 08/2000

WorldCom/Sprint Deal Dies
Deutsche Telekom May be Ready to Buy
By Ken Branson and Kim Sunderland

After twisting in the wind for several days, the proposed $129 billion merger between WorldCom Inc.
(www.wcom.com) and Sprint Corp. (www.sprint.com) apparently is dead. Antitrust regulators in the European Union
(EU) and the United States killed it.

Given the U.S. Department of Justice www.usdoj.gov
Antitrust Division’s opposition to the merger, which filed suit to stop it, and the antitrust regulators of the
EU, who were just as opposed, a formal declaration to end the pursuit came July 13.

In the meantime, while Sprint CEO William Esrey says his company is not for sale, persistent rumors suggest the company is discussing an alliance with Deutsche Telekom AG
(www.dtag.de).

As the WorldCom/Sprint deal came to rest, Deutsche Telekom reportedly has been talking with Sprint, Cable & Wireless plc
(www.cableandwireless.com) and VoiceStream Communications Inc.
(www.voicestream.com). Neither DT nor any of its intended targets will discuss those rumors.

“There are a lot of rumors about these companies,” says Deutsche Telekom spokesman Hans Ehnert. “We at Deutsche Telekom don’t comment and we don’t join speculation in the papers or in the media about our company.”

Some analysts believe Sprint is an attractive prize for foreign telecom carriers that want to enter the world’s largest telecommunications market. Sprint–including its wireless subsidiary, the separately traded Sprint PCS
(www.sprintpcs.com)–is worth about $100 billion, based on its stock prices.

While U.S. law forbids a foreign company from owning more than 25 percent of an American carrier without a waiver from the FCC
(www.fcc.gov), it comes as no surprise to analysts that foreign carriers would try to enter the U.S. market this way, and DT has more incentive than most to try.

Still, Sen. Fritz Hollings (D-S.C.) says he will protest any such waiver.

“They’ve [DT] got to open up and go international and they know that, because they are late,” says Sue
Uglow, principal analyst at the London-based consultancy Ovum Ltd. (www.ovum.com).

Still, there is much for the German carrier to crow about. It dominates the largest economy in Europe; it is the biggest ISP in Europe; and it has lots of cash. In June, DT placed a $14.5 billion bond deal on the market, and saw it quickly oversubscribed. In May, the company’s shareholders authorized the issuing of new stock worth $95 billion.

In the meantime, Deutsche Telekom made clear it intends to be a major player in central and eastern Europe. A 50/50 partner with SBC Communications Inc.
(www.sbc.com) in the holding company that owns 60 percent of MATAV Rt
(www.matav.hu), the incumbent Hungarian carrier, Deutsche Telekom in early July announced it would buy out SBC, which would give it a controlling interest in
MATAV.

In addition, Deutsche Telekom has won a tender–the right to buy–on 51 percent of Slovak Telekom
(www.slovak.com). It also has acquired control from France Telecom
(www.francetelecom.com) in the Swiss data carrier MultiLink SA
(www.multilink.com), and 51 percent of the Czech fiber company PragoNet
(www.pragonet.cz).

It’s in the west that Deutsche Telekom has had less luck. A three-way joint venture with France Telecom and Sprint, Global One Inc.
(www.globalone.com) had operating troubles from the beginning. When Deutsche Telekom made a move last year on Telecom Italia SpA
(www.telecomitalia.it) without consulting its partners, the alliance began to unravel.

Sprint and DT eventually sold their shares in Global One to France Telecom, and the French carrier has bought up much of what it and DT once owned together.

As Uglow and other analysts see it, what drives DT’s acquisitive instinct is its customer base among German multinational firms, or multinational firms with a substantial
presence in Germany.

“And where are those guys from?” she asks rhetorically. “North America and Japan.”

That means that DT has to get busy in Asia and North America. Sprint fills the bill in North America: It has a nationwide long
distance network, a booming mobile business in Sprint PCS and an ILEC business in 18 states.

In addition, Deutsche Telekom already owns 10 percent of Sprint, a leftover from its three-way alliance with Sprint and France Telecom.

Cable & Wireless would provide a presence in Asia and North America–though nothing as broad as Sprint, so Uglow says she believes it would be an unlikely target at the moment.

It’s also possible that DT could acquire a remaining RBOC, but that seems unlikely, since the RBOCs don’t have much in the way of an international presence, and come with an obligation to provide local dial tone in the United States, the analysts say.

However, there has been renewed buzz about DT making another run at Qwest Communications International Inc.
(www.qwest.com). That, however, would seem to be an odd move, considering what happened between Qwest and DT earlier this year. After Qwest and the former US WEST Inc. had announced intentions to merge, DT reportedly engaged in merger talks with
Qwest. When published reports seemed to indicate that DT would be interested in Qwest but not in US WEST, US WEST officials threatened legal action, and the discussions between Qwest and DT reportedly ceased.

Would Deutsche Telekom buy WorldCom? Analysts think this is a possibility, but a remote one, given the importance DT’s management attaches to wireless assets, and WorldCom’s relative lack of such assets.

Finally, VoiceStream may be more what DT needs. VoiceStream, a wireless carrier, uses GSM technology, which dominates Europe. While its coverage may not be national, it is at least extensive in the United States. And, unlike Sprint, it comes without the obligation to offer local dial tone.