Telecom Merger Expected to Fold

Long-distance telephone companies WorldCom Inc. and Sprint Corp. probably will abandon their $120-billion merger agreement next week once they clarify how federal regulators’ objections to the deal would affect any future mergers, sources familiar with the situation said.

The Justice Department, in its largest merger challenge ever, last week sued to block the deal, saying the combination of the No. 2 and No. 3 U.S. long-distance telephone companies would hobble competition in the Internet and long-distance telephone markets.

The department filed a 65-page lawsuit mapping its objections to the deal. The companies have been in talks with regulators to better understand the agency’s arguments and to learn whether the objections set standards that would prevent other telecom mergers or alliances in the future, sources said.

“From a public policy perspective, the Department of Justice--while it appears decisive--really instituted a lot of gray areas for a lot of companies about what’s going to be allowed next,” said one source who declined to be named.

The companies want the Justice Department to clarify the conditions the government might consider for future telecommunications deals, sources said.

Could a Baby Bell, for example, ever merge with WorldCom or Sprint? Would two long-distance carriers be allowed to merge once more Baby Bells enter the long-distance market?

“The last thing you want to do is go through this again. That means really taking a step back and getting clear on what the rules really mean,” the source said.

WorldCom and Sprint declined to comment. The Justice Department could not be immediately reached for comment.

Though the companies were expected to cancel the deal as early as this week, it probably will be several more days before the companies conclude their discussions with regulators and unwind their complex merger agreement, sources said.

“It took a long time to create this deal, and it’s going to take more than a few days to unravel it,” a second source said.

Once divorced from WorldCom, Sprint would be an attractive takeover target for Deutsche Telekom or onetime suitor BellSouth Corp., analysts said.

Media reports have suggested that Deutsche Telekom and Sprint already have held preliminary merger talks, but industry sources said such reports were overblown. The German company merely has expressed its interest in Sprint, sources said.

Under the merger pact with WorldCom, Sprint can’t talk to any interested party before the merger agreement is officially nullified. Sprint would have to pay WorldCom a $2.5-billion breakup fee if it violated the so-called “no shop” agreement.

An actual bid for Sprint remains unclear since Deutsche Telekom would face intense regulatory scrutiny.

Deutsche Telekom, which has a war chest of more than $95 billion, is also rumored to be interested in Qwest Communications International Inc. and Britain’s Cable & Wireless.

However, sources said the German company will proceed cautiously with any potential bid since it has been burned by failed attempts in the past, such as its unsuccessful takeover of Telecom Italia.

Deutsche Telekom is also unlikely to make any major moves until mid-July, when the “quiet period” following its recent share offering expires, a source familiar with the situation said.

Qwest remained coy Wednesday about any potential deal with Deustche Telekom.

“This industry will continue to consolidate. Whether we’re in somebody’s plans or not, I just can’t comment,” Qwest Chairman Joe Nacchio told cable television network CNBC.