Sprint-Deutsche Telekom: A Cure for Sommer's Summertime Blues?

BERLIN -- Deutsche Telekom (DT Quote) Chairman Ron Sommer just can't seem to get a break.

Sommer has been desperate for a big international acquisition for months and he probably thought his luck was finally changing as U.S. and European regulators effectively killed WorldCom's (WCOM Quote) merger with Sprint (FON Quote). Not wanting to waste a good opportunity, Deutsche Telekom reportedly took up informal talks with Sprint that could lead to a $118 billion takeover, partly styled on the DaimlerChrysler (DCX Quote) stock-swap deal.

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Acquiring Sprint would certainly end Sommer's long-frustrated hunt for a major purchase that would make Telekom a global telecommunications contender. However, no sooner had Deutsche Telekom emerged as the favorite to scarf up Sprint than some meddling U.S. politicians raised objections to a possible takeover.

According to the Wall Street Journal, a group of some 30 senators led by Ernest Hollings, D-S.C., have expressed their concern about Deutsche Telekom and Sprint to the Federal Communications Commission, citing a seldom-observed law barring the transfer of FCC licenses to firms that are more than 25% owned by foreign governments. The German government currently holds some 59% of the former state-run monopoly. While the political interference presents a new obstacle for Sommer -- who is likely reluctant to attempt a deal without good chances of success -- Sprint probably presents too tempting of a prize not to make a bid.

Amid all the action, Deutsche Telekom shares closed down 1.30 euros, or 2.2%, at 58.50 in Frankfurt. ADRs traded in New York were down 15/16, or 1.7%, at 55 13/16. Sprint closed up 3 7/16, or 6.7%, 54 7/16.

Sommer has made no secret of his desire to become a big player in the U.S. and if Deutsche Telekom were able to acquire Sprint, it would certainly go a long way toward erasing the scars of his failed attempt to join forces with Telecom Italia (TI Quote) a little more than a year ago. It already owns 10% of Sprint from the Global One joint venture with Sprint and France Telecom (FTE Quote).

However, the fallout from the Telecom Italia debacle is also likely to keep Sommer from jumping in headfirst and trying to hurry any possible deal with Sprint. His newfound caution kept him from getting too deeply entangled in the messy Qwest (Q Quote)-U.S. West (USW Quote) merger early this spring.

Deutsche Telekom declined to comment on the recent press reports.

Since so many institutions were involved in the recent Deutsche Telekom share offering and bond issue, scads of observers also weren't allowed to go on the record, but "[Sommer] has been promising a deal in the U.S. for sometime now," according to one analyst from a major German asset management house. "It's too tough to call how things will eventually play out, but there are definitely good reasons for a deal with Sprint. I don't, however, think Sommer will rush anything."

The same analyst said that although the political maneuvering in the U.S. Senate against any potential Deutsche Telekom bid for Sprint was a headache Sommer didn't need, the shenanigans of Hollings and his colleagues probably weren't insurmountable for Deutsche Telekom. The FCC has waived ownership restrictions for World Trade Organization member countries in the past and although regulators said a merger of such scope would naturally face scrutiny, they may not wish to follow the example of Spain. That country's government recently nixed a merger between Telefonica (TEF Quote) and Holland's KPN (KPN Quote) on similar grounds, only to have the companies turn around and ask for a clarification of the decision. The officials ended up looking nationalistic, but at the expense of the Spanish company.

Other regulatory problems Deutsche Telekom may face could also be manageable. While setting up Global One with Sprint, Deutsche Telekom signed a "standstill agreement," saying it would not acquire a further stake in the company. In a prospectus published last month, Telekom also publicly disclosed that it "does not intend to remain as a long-term shareholder in Sprint" and "expects to dispose of its shares in Sprint."

But analysts are increasingly confident that Deutsche Telekom could overcome those hurdles. "It's not beyond their lawyers to find a way around this," said one UK-based telecom analyst, speaking before the news of the U.S. senators' opposition emerged. He pointed to the fact that the collapse of the WorldCom-Sprint merger made it arguable that material circumstances had changed.

A deal could also be eased by failed joint ventures of the past. The 10% of Sprint owned by France Telecom could possibly be swapped for Deutsche Telekom's interest in the Italian wireless operator Wind, in which the French have expressed an interest. France Telecom has already bought out its Global One partners.

But bartering with the French and cantankerous senators aside, if Deutsche Telekom doesn't end up acquiring Sprint, Sommer's brimming corporate war chest will likely allow him to muscle his way into the U.S. market one way or another before too long.