Update: WorldCom, Sprint Withdraw Merger Proposal

Updated from 8:46 a.m. EDT

Just hours after the U.S. Justice Department announced that it will try to block in court the proposed merger between WorldCom (WCOM Quote) and Sprint (FON Quote), the two telecommunications giants withdrew their merger plans.

In a joint statement, the two companies announced that they were pulling their merger petition filed with the European Commission. "If, in the future, the parties decide to proceed with the merger, they will make such notifications as are appropriate under European merger laws," the companies said.

The proposed deal has been under scrutiny by regulators both in Washington, D.C. and Brussels and the go-ahead from both bodies was seen as crucial for the deal to succeed.

The Justice Department contends that the deal would hurt competition and raise prices for a host of telecommunications services, from long-distance and international phone rates to data transmission and Internet fees.

"If this deal were to go through, consumers and businesses would pay the price," said Attorney General Janet Reno, in a news conference Tuesday. Reno said the deal would reduce the U.S.' telecommunications landscape from three large players -- Sprint, WorldCom and AT&T (T Quote) -- to two.

Both Reno and Joel Klein, the Justice Department's chief antitrust regulator who was also present at the news conference in Washington, related the decision to the breakup of AT&T's monopoly in the 1980s, saying that approving the Sprint-WorldCom deal would be akin to returning to the days when AT&T had a chokehold on American consumers.

"We must continue to go forward for better innovation and competition," Reno said, "not backwards to a telecom monopoly."

In anticipation of the Justice Department announcement, both companies released statements prior to the news conference that left open the possibility of a restructured deal.

"We are disappointed that we have been unable to convince the Justice Department that the merger is in the best interest of the American public and would advance competition," said J. Richard Devlin, executive vice president and general counsel for Sprint, in a statement. "Over the next several days we will determine our next steps."

WorldCom issued a terse one-paragraph statement: "WorldCom was advised today that the U.S. Department of Justice intends to file suit to block WorldCom's proposed merger with Sprint. WorldCom will promptly review its options with Sprint."

At the same time, regulators in Europe snubbed the deal. The European Commission was expected to vote it down Wednesday, according to published reports.

It had been clear since the proposed merger was announced last year that Sprint's Internet business would have to be sold to meet regulatory approval. However, regulators had said that was not enough. In recent weeks, the companies reportedly began weighing the selling of Sprint's long-distance business, amid concerns the Justice Department was prepared to bar the merger on antitrust concerns.

Analysts expect Clinton, Miss.-based WorldCom to remain active in the merger game should the deal with Sprint, based in Westwood, Kan., ultimately fail, according to a report last week in TheStreet.com.

A report issued Tuesday by Kaufman Bros, a New York investment bank and research firm that specializes in the communications sector, offered several scenarios. Under one, the merger proposal would be restructured into a three-way deal, with WorldCom keeping Sprint PCS (PCS Quote), Sprint's wireless division, and selling off Sprint's long-distance and Internet units to Deutsche Telekom (DT Quote).

Another scenario posits that WorldCom, since its valuation is lower compared to many other telecoms, could become a takeover target itself, according to the report, titled "The Hunter Becomes the Hunted." While WorldCom was lately at up 2 7/8, or 8%, at 40 3/8, Kaufman Bros expects it to hit 50 in the near term, according to analyst Vik Grover, the author of the report. Kaufman has a year-end price target of 63.

Technically, the deal remains under review by the Justice Department and the Federal Communications Commission. The open question - on which the companies are not commenting - is if the pair will fight regulators in court.

Sprint was lately up down 1 3/8, or 2%, at 58 3/16.