Europe suitors eye Sprint
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June 27, 2000: 2:51 p.m. ET
German, French telecoms may be in the wings if WorldCom deal is jettisoned
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LONDON (CNNfn) - With WorldCom Inc.'s $129 billion purchase of Sprint Corp. on the ropes, would-be suitors in Europe may soon be lining up to swipe all or part of Sprint, the No. 3 U.S. long-distance provider, if the merger falls apart.
The U.S. Justice Department Tuesday sued to block the planned merger, citing threats to competition and the Internet's growth, which prompted the companies to abandon their scheduled antitrust review by European Union competition officials. That may signal the deal's death knell sometime soon.
Analysts and investment bankers said the German telecommunications powerhouse Deutsche Telekom, which has long telegraphed its desire to bulk up its U.S. presence, would be a frontrunner if the deal falls apart.
"If the merger is blocked then there will be a number of parties that will be interested in all or part of Sprint's assets," said one investment banker who has worked on deals in the telecom sector. "It's really an imperative for a lot of people to be looking at it. The ingredients are there for a lot of dialogue."
European telecom companies, such as Deutsche Telekom, have been filling up their coffers by selling pieces of their Internet and mobile phone divisions. Deutsche Telekom has said it has been authorized by its shareholders to raise up to 100 billion, or $94.1 billion, to carry out a buyout.
Deutsche Telecom, or any of several European competitors, could be joined in a Sprint courtship by regional U.S. phone firms such as BellSouth (BLS: Research, Estimates) or SBC Communications (SBC: Research, Estimates) who want to offer long-distance service, analysts said.
One advantage for either Deutsche Telekom or rival France Telecom is that they each currently have a 10 percent stake in Sprint (FON: Research, Estimates) - which they would sell to WorldCom (WCOM: Research, Estimates) if the deal is completed. Those stakes are now worth about 8.4 billion or $7.9 billion.
Wireless, Internet stakes coveted
The crown jewel at Sprint, analysts said, is its wireless business, which while yet to be a money-maker is among the largest in the United States, and is poised to tap what is expected to be strong growth in the coming years. Its Internet backbone, or network infrastructure, is also appealing. While long-distance is a cash generator, profit margins are shrinking due to the stiff competition that has emerged in the U.S. market in the last few years.
"Having a wireless play has been essential for anyone who wants to be a full-service telecom player," said Graham Finnie, associate consultant with the telecommunications consulting firm Yankee Group. "Sprint is not going to have any problems finding a buyer if this deals falls through."
"It is do-or-die time for Deutsche Telekom," said Finnie, who added the German company has been flat-footed as the telecom merger dance has raged in recent months. "It's rare to find a Sprint out there ... Frankly, I'd be quite surprised if Deutsche Telekom didn't make a bid."
Finnie said France Telecom would be the best fit as a buyer for Sprint, largely because of its wider breadth of wireless properties in Europe. He also speculated that Spain's Telefónica (TEF: Research, Estimates) could be drawn to Sprint because it would offer a U.S. foothold to complement its broad Latin American base.
Not the first examination
To be sure, many of the companies have already considered a bid for Sprint and ruled out the possibility - largely for its high price. Even if the WorldCom offer falls apart, Sprint's shares are likely to kick back upward on speculation a new bidder would be on the way, analysts said.
"Deutsche Telekom have already reviewed it, and they were frightened off by the price," said James Downie, an analyst with ABN Amro in London.
One analyst, however, debunked the prospects of a trans-Atlantic deal.
"I'm not aware of any European company that would be interested," said James Golub, a telecom analyst with Goldman Sachs in London. France Telecom and Deutsche Telekom just want to cash out their Sprint stakes, he said.
"They've already penciled in the cash, and they'll be disappointed if they don't get it," said Golub, adding that Deutsche Telekom "has always been pretty scathing about [Sprint] in the past."
Deutsche Telekom declined to comment on speculation, but spokesman Hans Ehnert said the company might re-evaluate its plans to sell the Sprint stake should the WorldCom deal collapse. The German giant often has said it wants to build its mobile and consumer Internet businesses.
Not an easy ride
Yet for all the possibilities, most potential European suitors would still face an array of hurdles. On significant barrier is American investor reticence about holding shares in an overseas-listed company.
For WorldCom to salvage the deal, which could potentially increase the Internet backbone holdings of a company whose UUNet division is already the world's leader, regulators and the merger partners have been hashing out prospects of a sale of assets that would make the deal more palatable to the officials. That would require talks with other telecom companies.
Deutsche Telekom, for its part, would have been a latecomer to such talks investment bankers said, because it has just recently emerged from a quiet period as part of a third stock offering.
Golub said Deutsche Telekom might be more eager to get its hands on Qwest Communications (Q: Research, Estimates), the No. 4 U.S. long-distance provider, which is set to complete its buyout of Bell operator U S West within the next few weeks. The companies held abortive talks toward such a deal, only to run into complaints from U S West, which saw it as an effort by Qwest to weasel out of their planned merger.
France Telecom (FTE: Research, Estimates), on the other hand, is fresh off a $40 billion purchase of British mobile phone service provider Orange. An offer of more than $100 billion for Sprint would require reducing the stake of the French government in the one-time monopoly to less than 50 percent.
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