If Merger Fails, Expect WorldCom to Return to the Hunt

If regulators block WorldCom's (WCOM) merger with Sprint (FON), expect the companies to proceed much as they came together -- as hunter and hunted.

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Nextel, VoiceStream Head List of Would-Be WorldCom Wireless Targets

As TheStreet.com reported Tuesday, the Justice Department is preparing to oppose the $115 billion deal as early as next week. WorldCom reportedly proposed $45 billion worth of asset sales Wednesday as a concession to regulators, but observers say even that might not save the deal. WorldCom declined to comment. With possible European action against the deal brewing as well, shares of both companies slid Wednesday, as investors speculated that eight months of merger-related work could go down the drain.

Without the merger, analysts say, WorldCom will resume stalking prey in a long string of acquisitions. This time, the hunt could take WorldCom into the domestic wireless market, or lead to possible linkups with the likes of local phone giant BellSouth (BLS) or business communications provider NextLink (NXLK). In any case, observers expect the company to continue to think big, even if regulators scotch what would have been the biggest domestic telecom deal ever. WorldCom, BellSouth and Nextlink representatives declined to comment on merger speculation.

Company at a Glance WorldCom (WCOM:Nasdaq)
Quarter to March 31	Figure	Change from year-ago
Revenue	$9.98 billion	+9%
Net income	$1.3 billion	+78%
EPS (diluted)	44c	+83%
Source: Company, Yahoo! Finance.

Sprint has suffered in the merger process much more so than WorldCom, particularly in terms of management departures, say industry observers. "A lot of the people at Sprint are cognizant of what [WorldCom chief Bernie Ebbers] did to MCI," says Wasserstein Perella telecommunications analyst William Klein, whose firm has no banking ties to any of these companies. "He went through with a machete. So they made their moves to get out."

Going Global

For Sprint, the failure of the merger -- a merger that may have fed workforce attrition -- will increase pressure to sell to an overseas phone giant.

The conventional wisdom has long paired Sprint with one of the European phone giants, Deutsche Telekom (DT), France Telecom (FTE) or British Telecom (BTY). Those names, in that order, are now being tossed around again by industry experts, as TheStreet.com reported earlier today. Deutsche Telekom and British Telecom were unavailable for comment, and France Telecom declined to comment on deal speculation. Sprint declined to comment on deals, while saying the WorldCom merger talks are ongoing.

"It feels like the right time for international players to come in and take out a major carrier in this country," says telecommunications analyst Brian Adamik of Yankee Group, which consults to all the major telecommunications companies. "It is almost too obvious. Sprint's looking to sell and Deutsche Telekom is looking to buy. Sometimes it just ain't more complicated than that."

Deutsche Telekom has made it clear that a U.S. telco fits squarely within its acquisition strategy. You may recall Deutsche Telekom made a nearly disastrous attempt to woo Qwest (Q) away from merger partner U S West (USW).

Stock at a Glance WorldCom (WCOM:Nasdaq)
Recent Price	40
52-week high	64 1/2
52-week low	35 7/8
52-week change	-35%
Market cap	$115 billion
Source: Company, Yahoo! Finance.

Deutsche Telekom and France Telecom make sensible partners for Sprint at this point, says Klein, who has no rating on Deutsche Telekom, France Telecom, WorldCom or Sprint. "It's all going to come down to price," the analyst continues. "With Sprint, you have some distressed assets that will require at least six to 12 months' worth of serious capital commitment to build the company back up."

More of the Same

Meanwhile, WorldCom, the Jackson, Miss., company that is the sum of more than 70 acquisitions in nine years, is expected to continue its mergers and acquisition ways.

While some speculate that NextLink, the business-targeted data and phone provider, would fit well within WorldCom's local-access strategy, others say that's thinking too small. Adamik, for one, says WorldCom has grown into the beast it is by making bigger and bigger deals along the way, and that's not likely to change.

"Do you go back to making mere $10 billion acquisitions, or do you bite off something big?" Adamik asks. "Ebbers likes to do things in grand sorts of ways. That's always been the key to his success."

Observers say outfits as big as SBC (SBC) and Verizon, as the combined Bell Atlantic (BEL) and GTE (GTE) will be known, are out of the question. But BellSouth is appealing because of its local networks and potentially its wireless operations, and as a local telco, would certainly raise fewer antitrust issues than a long-distance play like Sprint, says Adamik.

"But then you also have to wonder if we will see a deceleration of acquisitions," says Adamik. "As we have seen, it is extremely counterproductive, spending your time with lawyers and regulators without getting deals closed."

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