Let the bidding frenzy begin. Possibilities are blowing open now that Sprint Corp. and WorldCom Inc. ended their $115 billion merger plans and reports of suitors for VoiceStream Wireless Corp. circulated last week.
Germany’s Deutsche Telekom AG and a partnership of Japanese operator NTT DoCoMo and Hong Kong’s Hutchison Whampoa Ltd. are said to be making separate bids for VoiceStream Wireless Corp.
But a new wild card-national security concerns-suddenly casts a cloud over possible telecom takeovers by overseas firms, particularly those indirectly owned by foreign governments. Sen. Ernest Hollings (D-S.C.), ranking minority member of the Senate Commerce Committee, and other lawmakers are stepping up pressure-through legislation and brow-beating letters to federal regulators-to block purchases of U.S. telecom carriers by foreign-government-owned telecom firms.
In light of the Department of Justice’s plan to take its opposition to the merger to court, WorldCom and Sprint concluded the conditions DOJ demanded would compromise customer and financial benefits of the merger. DOJ also would be unable to take the case to trial before 2001, and the companies did not want to pursue protracted litigation.
The merger was thought dead weeks ago after antitrust czars at the DOJ and the European Union rejected the transaction. The collapse of the deal, punctuated with angry parting words from WorldCom head Bernard Ebbers, now leaves Sprint PCS, Nextel Communications Inc. and VoiceStream the three remaining independent wireless carriers that offer near-nationwide service.
Analysts agree WorldCom is in a shakier position than Sprint, which has a wireless play. WorldCom’s primary reason for merging with Sprint was to gain access to wireless services, which it resells today.
“If they want to get into wireless, they don’t have much of a choice,” said Christopher Larsen, senior wireless services analyst with Prudential Securities Inc. in New York. “They can buy one of the other two, buy their own spectrum or sign a reseller agreement.”
Dataquest/Gartner Group analysts point out that continuing with a wireless resale strategy is not enough in the long-term and will not raise WorldCom’s valuation.
Nextel has been touted as a likely candidate, despite the fact that WorldCom and MCI Communications Corp.-before being purchased by WorldCom-previously walked away from talks with Nextel because it commanded too much of a premium and for other reasons. The price of entry into the United States is likely to be steep for everyone.
“No matter how WorldCom looks at this, the price of entry has just gone up because the field of possible wireless acquisitions has narrowed,” said Dave Kendall, group vice president for Gartner’s Consulting Services. “Takeover targets include Nextel, for which WorldCom has already made an unsuccessful bid. A merger with Vodafone would be a coup, but not likely. However, it is not at all out of the realm of possibility that WorldCom would still have a shot at Sprint PCS assets as a partner in a three-way deal with a non-traditional acquirer.”
VoiceStream is garnering interest from foreign companies such as DT-which is said to have offered the GSM carrier around $32 billion-and Japan’s NTT DoCoMo, which reports indicate may team with Hutchison to buy a 49-percent stake in VoiceStream.
Hutchison holds a 23-percent interest in VoiceStream today and has moved aggressively to position itself in the third-generation market in Europe and Asia. Hutchison most recently teamed with NTT DoCoMo and Dutch company KPN to bid on European 3G licenses.
“I think the company that’s been the most quiet is the one that is the most interesting, and that’s Hutchison,” said Timothy O’Neil, wireless services analyst with Stamford, Conn.-based Wit SoundView. “The one market it has not moved aggressively in is the U.S. market. It seems that NTT, KPN and Hutchison are capable of making a move in the U.S. market, and it may be a Deutsche Telekom overture toward VoiceStream that pushes them into moving now vs. later.”
The $32-billion price tag news reports are putting on the DT bid for VoiceStream is likely too low as U.S. wireless growth predictions are high, along with carriers’ assets. VoiceStream could be valued at about $50 billion, given its $37-billion market capitalization, $5 billion in debt and the premium it could demand. NTT and Hutchison may offer as much as $52 billion, according to the Wall Street Journal.
“VoiceStream and Powertel are pretty hot,” said O’Neil. “The only thing that cools them off is if the seller is not motivated. If so, they will look for a higher price. It comes down to how much companies are willing to pay per subscriber. The U.S. market is in the process of shifting tides right now where the waters are somewhat stagnant on mobile data.”
DT has clearly voiced its interest in entering the U.S. market, having listed shares and floated bonds in order to gain the cash it needs. But analysts are unclear of what type of strategy DT is looking for-a pure wireless play or an integrated services play like Sprint PCS has.
“Obviously part of their vision encompasses gaining a presence in the U.S.,” said Herschel Shosteck, president and chief executive officer of Herschel Shosteck Associates Ltd. in Wheaton, Md. “We’re unsure if it’s any more focused than that.”
VoiceStream offers a European-compatible Global System for Mobile communications footprint in the United States, but is only a mobile play, noted Shosteck. Sprint PCS uses incompatible Code Division Multiple Access technology but offers DT an Internet backbone, local and long-distance customers as well as a mobile business. Nextel offers a pure wireless play with technology that could be migrated to GSM technology.
But all the speculation about a foreign purchase of Sprint PCS, Nextel or VoiceStream rests on what has become a very fragile foundation.
Last week, Hollings reiterated his concerns about U.S. telecom carriers being acquired by foreign-government-owned telecom companies. In fact, in so many words, the powerful South Carolina Democrat directed Federal Communications Commission Chairman William Kennard not to approve any such waivers.
“The law is clear. Moreover, public policy dictates that we not permit the anti-competitive acquisition of our domestic telecommunications companies by foreign-government-owned entities … We did not deregulate U.S. telecommunications to permit the regulated foreign-government-owned telecommunications companies to take over the U.S. market,” Hollings told Kennard in a July 12 letter.
The letter follows a June 29 letter on the same subject from Hollings and 29 other U.S. senators to Kennard. Hollings and others recently introduced a bill to ban-without exception-firms more than 25-percent foreign-government owned from buying U.S. telecom carriers.
The legislation, if enacted, would make it difficult for DT, France Telecom and others to enter the U.S. market.
Under current law, direct foreign-government-owned control of U.S. telecom firms is banned. But indirect control of up to 25 percent by foreign-government-owned firms is allowed.
