Achtung! Congress May Spoil a Deutsche Telekom-Sprint Merger

Congress is acting like it wants to spoil Deutsche Telekom's (DT) courtship of Sprint (FON), but Wall Street believes the politicians are posturing.

Last week, 30 senators sent a letter to the Federal Communications Commission claiming that allowing a company largely owned by a foreign government to buy a U.S. telecom would put "domestic competitors at the mercy of a foreign government." While the letter mentioned no specific companies, the German government just happens to own 57% of Deutsche Telekom.

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Then this weekend there were reports that Deutsche Telekom had begun serious discussions with Sprint in the wake of its failed merger with WorldCom (WCOM). TheStreet.com also has written about this possibility.

But some Wall Street deal watchers say the senators are posturing to possibly seek a strong negotiating position on matters including free trade and electronic security issues with the German government. More importantly, they say the letter signals that a Deutsche Telekom-Sprint deal is edging closer to reality. Sprint and Deutsche declined to comment, as did WorldCom.

"I don't think you would have a letter written by members of Congress if a lot of people weren't anticipating something is in the works. It looks like they are taking a strong negotiating stance at the beginning by saying, 'If you want this then we will want XYZ in your country,' " says Michael Kaufman a hedge fund manager with K Capital Partners.

"I have a little difficulty seeing them block a deal. But it does raise political concerns when you have a large foreign corporation acquiring what could be considered a strategic asset within the U.S.," adds Kaufman, who has no position in Deutsche Telekom and has small positions in Sprint and WorldCom.

Shares of Deutsche Telekom closed down 15/16 at 55 13/16 Monday, while Sprint was up 3 5/16 to 54 5/16 and WorldCom was down 3/4 to 45 1/8.

A Deutsche Telekom spokesman says the company is monitoring the situation in Congress.

"We believe in a totally open fully liberalized market with no restrictions on foreign companies. We have hundreds of tough competitors including American companies, and we have no restrictions here to foreign ownership or activities of foreign companies in our market," he says.

He adds that the German government is intent on selling off its Deutsche Telekom stake in small increments as market conditions permit. The stake is too large to divest at once, he says.

But along with the letter to the FCC, Senator Ernest Hollings (D., S.C.), ranking member on the Senate Commerce Committee, proposed legislation last week to prohibit foreign government ownership of U.S. telecommunications assets. The bill attempts to strengthen federal rules regarding the transfer of telecommunications licenses to companies that are more than 25% foreign government-owned.

"This isn't posturing," says Andy Davis, a Hollings aide. "This is an attempt to take a comprehensive look at what might be in the nation's best interest. Some foreign players have strong anticompetitive advantages, and we may have a situation here in the U.S. that is ripe for the picking."

But Deutsche Telekom may have seen this coming. The company, which flubbed previous acquisitive attempts at big American phone companies, has met with U.S. government officials in recent months in a bid to learn how to walk the tangled path to merger success.

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