MCI WorldCom Inc. and Sprint Corp. last week agreed to a definitive merger agreement that will combine the second- and third-largest U.S. long-distance carriers and give MCI WorldCom a much-needed nationwide wireless presence.
According to the agreement, each share of Sprint will be exchanged for $76 of MCI WorldCom common stock. In addition, each share of Sprint PCS Group will be exchanged for one share of a new WorldCom PCS tracking stock and 0.1547 shares of MCI WorldCom common stock.
The deal, which is valued at $129 billion, including $14 billion in debt, ranks as the largest corporate takeover to date.
Ever since WorldCom and MCI agreed to merge two years ago, analysts have indicated the company still needed a nationwide wireless presence to compete with its long-distance rival AT&T Corp. The Sprint deal gives MCI WorldCom an instant national wireless presence with 270 million pops and a subscriber base of about 4 million people.
Tole Hart, industry analyst with Dataquest, said the deal gives MCI a strong wireless network with few headaches because it already is digital and it doesn’t use legacy back-office systems. Hart also said the deal helps Sprint PCS access the business market on which MCI WorldCom has focused.
In addition, a combined MCI WorldCom/Sprint would control a large portion of the multichannel multipoint distribution services spectrum, which the companies plan to use in conjunction with digital subscriber lines to bypass cable and traditional telephony. The companies indicated they plan to invest between $400 million and $600 million through 2001 to build out their MMDS properties.
“The merger with Sprint is particularly timely as wireless communications emerges as a critical component of full-service offerings,” said Bernard J. Ebbers, president and chief executive officer of MCI WorldCom. “Increasingly wireless will be used for Internet access and data services, two areas in which both companies excel.
“Gaining an all-digital nationwide footprint with common technology and spectrum that delivers next-generation capabilities is of paramount importance,” he said.
Andrew Sukawaty, CEO of Sprint PCS, said he was pleased with the deal.
“It gives us a much larger base of customers to cross-sell to, and it makes us financially a much stronger company,” said Sukawaty.
Sukawaty said the companies have agreed to a commercial business arrangement prior to closing the transaction under which MCI WorldCom will sell Sprint PCS service under the WorldCom brand through an agent agreement. MCI WorldCom currently resells wireless service and has an estimated 500,000 subscribers.
The Sprint PCS business-to be renamed WorldCom PCS-initially will be tracked by a separate stock, but the companies indicated it is likely the operation would be folded into the combined company in the future.
While many analysts say the deal is good for MCI WorldCom, others wonder what effect it might have on Sprint PCS, which has successfully built a large wireless network in a short period of time.
“Any effect this agreement will have on Sprint PCS will either be non-beneficial or pejorative in terms of slowing down innovation,” said Kelly Quinn, senior industry analyst at Strategy Analytics Inc.
Christopher Larsen, analyst at Prudential Securities Inc., said he expects Sprint PCS stock to fall to less than $60, down from a level near $80 before the deal was announced. Sprint PCS stock was trading around $72 midday Friday, up from its Thursday close of about $70.
“If they acquired them for something that was a hard asset-whether it be cash or WorldCom stock-and then WorldCom spun it back out, that would be good theoretically for the Sprint PCS (shareholders),” said Larsen. “But the stock traded up on the hopes that they would be acquired, and they’re not really being acquired, they’re being assumed.”
Both companies’ boards have approved the agreement, which now must win the approval of shareholders as well as several regulatory bodies. The deal is expected to face tough regulatory scrutiny due to the concentration it would create in the long-distance market (See related story on Page 2). The combined company also might be required to divest some Internet backbone interests.
Several groups urged regulators to closely scrutinize the arrangement, including the Telecommunications Resellers Association, the Communications Workers of America, SBC Communications Inc. and Bell Atlantic Corp.
The deal is expected to close during the second half of 2000.
Pressure
Jon Dorfman, a consultant at The Strategis Group, said the deal puts pressure on AT&T because with four carriers holding a nationwide wireless presence and data becoming increasingly important, MCI WorldCom/Sprint holds an advantage.
“All these companies now are thinking about how to evolve their networks, and they’re evolving to support data over some version of 2.5 or 3G,” said Dorfman. “MCI is going to be combining its Internet side and a lot of its expertise there, with Sprint, who presents right away a nationwide footprint.
“Theoretically, we’re moving toward this model where these carriers want to own these subscribers, and there is going to be some tension soon between the carriers and the content providers over who owns wireless subscribers,” he said. “The carriers’ greatest fear is that they become just the pipe.”
The deal also puts pressure on BellSouth Corp., the southern Baby Bell that has steadfastly maintained it could survive as a regional player. BellSouth made two bids for Sprint early last week, the second one reportedly for $100 billion.
“It was a transformational opportunity to combine unique assets in a way that would accelerate both vertical and horizontal growth and create additional shareholder value,” said Duane Ackerman, chairman and CEO of BellSouth, after talks with Sprint failed. “We owed it to our shareholders and employees to explore this opportunity.”
Analysts said the bids suggest BellSouth may be conceding it needs a larger presence, and speculation circulated the company might examine Global System for Mobile communications carrier VoiceStream Corp. or enhanced specialized mobile radio operator Nextel Communications Inc. as possible partners.
“It doesn’t force them to do anything, but it did show their hand that they have an interest in being something more than they are today,” said Prudential’s Larsen.
Both BellSouth and VoiceStream use GSM technology, and a combination of the two would present little overlap. A marriage between BellSouth and Nextel would satisfy existing spectrum-cap rules, although Nextel’s limited bandwidth could hamper future data deployments, and Nextel’s integrated Digital Enhanced Network technology is incompatible with BellSouth’s networks.
BellSouth also has ties with Qwest Communications International Inc., which analysts said the company might look to expand if granted regulatory approval to enter the long-distance market.
BellSouth spokesman Jeff Battcher said the company does not comment on speculation about potential mergers. He said the company is not interested in consolidating for the sake of consolidation, but if the right opportunity came along, BellSouth would consider it.
Some analysts said additional bidders could emerge for Sprint, although the most likely challenger, Deutsche Telekom, would have had plenty of time to put together a counteroffer because it has a seat on Sprint’s board and would have known about the discussions with MCI WorldCom weeks ago.
Deutsche Telekom and France Telecom, both stakeholders in Sprint through the trio’s Global One joint venture, are expected to sell their interests in the company. Analysts expect the carriers to use those proceeds for further international expansion.
