MCI WorldCom Inc., the nation's second-largest long-distance telephone company, is in talks to buy Sprint Corp., the third-biggest carrier and a leader in cellular service, in a deal that would create a telecommunications giant armed to compete for every piece of the market, sources close to the discussions said yesterday.
Neither company would publicly confirm the talks, which could still dissolve over any number of issues. But a former MCI executive with knowledge of the discussions said the company has eyed Sprint since 1995, as it sought to plug what now appears as a gaping hole in its product offerings--wireless phone service.
Fearful that a wave of recent mergers among wireless players would leave MCI hopelessly behind, the source said, the company recently renewed talks with Sprint, which has 4 million cellular customers and a national wireless network, Sprint PCS.
"These discussions have been going on for some time," the former MCI executive said. "Clearly, MCI's been looking for a wireless strategy."
The market reacted with worry, lopping $2.37 1/2 off MCI WorldCom's stock--more than 3 percent--amid worries that purchasing Sprint would dilute earnings. Sprint rose $2.87 1/2 to $54, in anticipation of a premium price.
Analysts called the potential deal--reported in yesterday's Wall Street Journal--a solid fit for both companies. Sprint would gain deep pockets and global marketing acumen, as well as direct links to customers in key markets. MCI has devoted much capital to linking with local telephone companies around the nation in preparation for eventual competition for local service and growing demand for high-speed Internet access.
MCI would gain more long-distance customers. Best of all, it would land Sprint PCS, which added 600,000 customers last quarter alone.
"Of all the options that MCI WorldCom and Sprint could consider, this is the most synergistic approach," said Roger Wery, a communications analyst with Renaissance Worldwide, a Boston-based management consulting firm. "The new company would offer a one-stop shop of all communications technologies."
That goal--offering a full array of services--has driven a host of recent mergers throughout the telephone business, as big players morph into huge ones, using soaring stock values to snap up competitors and add new pieces to expanding networks.
AT&T Corp. has led the way, buying up cable franchises with plans to use them in selling everything from high-speed Internet access to video entertainment and local and long-distance phone service.
Just this week, Bell Atlantic Corp. turned itself into the largest cellular player in the nation, with more than 20 million customers, when it announced a joint venture with Vodafone AirTouch PLC--itself the product of a recent merger.
In a smaller deal, VoiceStream Wireless Corp.--which in June gobbled up Omnipoint Corp.--announced plans to buy Aerial Communications Inc. for $3.3 billion.
At first blush, a merged MCI and Sprint might attract more than a little scrutiny from federal regulators, who would have to approve such a deal. The resulting company would have $35 billion in annual revenue and control 30 percent of the nation's long-distance market, second only to AT&T.
Indeed, MCI WorldCom chief executive Bernard J. Ebbers was quoted in June as saying his company wasn't talking to Sprint because a merger might have trouble passing muster with regulators. Some suggested the dip in MCI's stock yesterday in part reflected regulatory worries.
Should Sprint consummate a deal with MCI, it would end years of rumors that the company would be purchased by Deutsche Telekom AG, the German carrier, with whom Sprint is marketing international phone service, along with France Telecom SA, in a venture called Global One.
As Sprint officials have acknowledged, that venture has foundered amid cultural difficulties and disagreements about pricing.
Given those difficulties, analysts yesterday pronounced MCI a far less problematic suitor.
MCI originally launched discussions with Sprint four years ago, but could not agree on a price, the former MCI executive said. Then came talks with Bell Atlantic, the source said, but the price proved elusive.
Three years ago, the company began serious talks with British Telecommunications PLC, eventually fielding a $21 billion offer. But then WorldCom, a little-known but growing long-distance company based in Clinton, Miss., swept in and outbid the British giant, taking MCI for $37 billion.
That deal did not end the firm's quest to carve out a wireless niche. In May, MCI bought SkyTel Communications Inc. for $1.75 billion, in the process claiming 1.6 million customers. Last spring it went after Nextel Communications Inc. of McLean, one of the largest U.S. cellular companies, but Ebbers declined to pull the trigger, alarmed by the roughly $13 billion price tag and Nextel's $7.7 billion debt.
Indeed, the same thing could happen with Sprint. The high-flying company is worth some $47.9 billion, based on yesterday's closing price. Sprint PCS is worth another $32 billion. The firms are carrying $11.9 billion in consolidated long-term debt, a Sprint spokesman said. MCI would obviously have to hand over a premium to take control.
But some said any MCI reluctance could be overcome by the fact that the wireless market is growing at about 15 percent a year, contrasted with 2 percent a year for the long-distance market.
The recent wave of mergers has only injected more urgency into the pursuit, said the former MCI executive. For MCI's leaders, he said, "It's like, holy [cow], there are going to be some huge national carriers and we're going to be left out."
Staff writer Sarah Schafer contributed to this report.