MCI WorldCom, Sprint Expected to OK Merger
MCI WorldCom Inc. and Sprint Corp. are expected to easily win shareholder approval Friday for their $115-billion merger, but the biggest hurdle remains as the telephone companies attempt to win regulatory approval without facing onerous concessions.
Shareholders of both long-distance telephone companies will vote on the deal Friday in special meetings, but those votes are seen as largely procedural, analysts said.
The real test will come as the companies try to convince U.S. and European regulators that the combination of the No. 2 and No. 3 U.S. long-distance companies won’t harm consumers or industry competition.
Regulators have been closely studying the combined companies’ potential power in areas of Internet transmission, long-distance telephone service and global telecommunications services for large, multinational companies.
The European Commission said Wednesday that it would send the companies a statement in the next few days outlining concerns about the deal’s potential competitive problems.
The commission rarely blocks mergers but often demands concessions, normally asset sales, as a condition for clearing them. It must make its decision on the MCI WorldCom/Sprint deal by July 12.
U.S. regulators, meanwhile, are conducting a parallel study of the merger and can make their decision at any time.
The companies have said they would be willing to shed Sprint’s Internet backbone operations if needed to gain regulatory approval, but more stringent concessions could be required, analysts said.
A source said the European Commission wants the companies to shed MCI WorldCom’s powerful UUNET Internet unit rather than Sprint’s Internet operations. MCI WorldCom’s UUNET business is the No. 1 Internet backbone provider. Sprint’s is No. 2.
“We’re looking at UUNET. We’re not certain we can force them to sell it, but that would be our preference,” the European Commission source said.
MCI WorldCom, however, would not submit to such conditions, a source close to the company said.
“WorldCom would cancel the deal before getting rid of UUNET. That’s the heart of the growth going forward,” the source said.
MCI WorldCom and Sprint declined to comment on the details of the regulatory review, but they expect the deal to close in the second half of the year.
The companies also may be forced to guarantee minimum investment levels in developing technology such as MMDS (multichannel multipoint distribution service), or commit to an expansion of DSL-based (digital subscriber line) local high-speed service for consumers and small businesses, analysts said.
Scott Cleland, an analyst with Legg Mason’s Precusor Group, expects the Department of Justice to block the deal outright because divestitures or other concessions might not be realistic or successful.
When WorldCom bought MCI Communications in 1998, the companies were forced to sell MCI’s Internet backbone operations to win regulatory approval.
MCI WorldCom, however, recently agreed to pay Cable & Wireless $200 million to settle C&W;’s claim that MCI WorldCom had not delivered what it promised when it sold that business.
Cleland said that sale, which he called the “poster child” of divestiture problems, could prompt the government to toughen its divestiture standards in the future.
In addition to their power in the Internet market, MCI WorldCom and Sprint would hold 35% of the U.S. long distance market. Market leader AT&T; Corp. controls about 45% of the market.
Federal Communications Commission Chairman William Kennard previously raised concerns about the deal, saying the combination could represent a “surrender” from the robust competition that has driven down long-distance calling rates for consumers.
MCI WorldCom and Sprint said customers would still have a choice of telephone service providers.
More than 98% of the U.S. would be served by at least three facilities-based carriers, with more than 90% of the country served by four or more carriers, they said.
MCI WorldCom, the product of more than 60 acquisitions over the last decade, won Sprint’s hand in October after elbowing aside rival bidder BellSouth Corp.
The planned deal would allow Clinton, Miss.-based MCI WorldCom to enter the wireless telephone market and to expand its long-distance customer base.
MCI WorldCom shares slipped $1.06 to close at $40.88 on Nasdaq. Sprint fell $1.13 to close at $59.38 on the New York Stock Exchange.
