Europe Regulators Reject Worldcom-Sprint Merger

Updated from 12:34 p.m. EDT

In a decision that was almost a moot point, the European Commission announced Wednesday in Brussels that it had rejected the fading merger deal between WorldCom (WCOM Quote) and Sprint (FON Quote).

The news was expected and comes a day after the would-be telecommunications powerhouse withdrew its petition for approval by the European Commission after the Justice Department -- which has simultaneously been investigating the competitive implications of the proposed merger -- filed suit to block the deal on antitrust grounds.

WorldCom's shares closed at 44 9/16, up 4 7/8 or 12%, while Sprint closed at 52 3/4, down 5 5/8 or 10%.

Regulators in Europe fear that the deal would impede competition, especially in the market for high-speed Internet access. WorldCom is the world's leading provider of Internet connections, with Sprint one of its main competitors.

"An in-depth investigation by the commission showed that the merger would, through the combination of the merging parties' extensive networks and large customer base, have led to the creation of such a powerful force that both competitors and customers would have been dependent on the new company to obtain universal Internet connectivity," the commission said in a statement.

After being notified by officials of the European Union that its deal was doomed, the companies offered on June 8 to divest Sprint's Internet activities, an overture rejected by regulators as inadequate.

When assessing the feasibility of the proposed divestiture, the commission also took into account issues raised by Cable & Wireless after its purchase of Internet MCI, which was divested from MCI's other activities to gain clearance for the WorldCom/MCI merger in 1998.

"It was vital for the commission that the divested business became a strong, viable competitor to prevent the merged Worldcom/Sprint from dominating Internet backbone. The companies' offer failed to guarantee this because Sprint's Internet business is completely intertwined with its traditional telecom activities," Mario Monti, the European competition commissioner, said in a statement.

While conducting separate investigations, the European Commission and the Justice Department did consult each other during the antitrust inquiry. And while the merger is not yet officially dead -- it is still before the Justice Department and the Federal Communications Commission -- the deal must be approved by regulators on both sides of the Atlantic. The companies could still challenge the Justice Department in court, but Wall Street analysts believe the pair will shun such a battle.

The companies would not comment on their next move.