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The U.S. Department of Justice Tuesday sued to block WorldCom Inc.’s $129 billion acquisition of Sprint Corp., though antitrust enforcers left open the possibility of the companies combining their wireless operations. “This merger threatens to undermine the competitive gains achieved since we broke up AT&T,” Attorney General Janet Reno said at a news conference. “If this deal were to go forward, consumers and businesses would pay the price.” Officials from Clinton, Miss.-based WorldCom and Westwood, Kan.-based Sprint said the companies would review the suit over the next few days. “We are disappointed that we have been unable to convince the Justice Department that the merger is in the best interests of the American public and would advance competition,” Sprint general counsel Richard Devlin said. Yet the companies clearly realize the deal cannot proceed as is. Shortly after the DOJ filed suit, they withdrew their application for approval by the European Commission, the executive branch of the European Union that reviews mergers. “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 in a prepared statement. The EC had been expected to vote today to block the deal. The Europeans worry the combined company would dominate the Internet backbone, which constitutes the wires and switches that make the World Wide Web work. Internet backbone operations were just one of seven markets where the merger would harm competition, the Justice Department alleged in its 65-page complaint. The others were domestic long distance, international calling, international private-line service, private lines used to connect local area networks, lines for private Internet sites and customized networks that large businesses use. “At its core, this is a three (company) to two (company) merger and the kind of merger that would harm a wide range of consumers,” said Joel Klein, assistant attorney general for antitrust, who was responsible for the suit filed in U.S. District Court for the District of Columbia. Absent from the suit was any discussion of the wireless business. This has caused some observers to speculate that WorldCom and Sprint might return to the Justice Department and EC with a wireless-only deal. Klein indicated the government might accept that type of limited transaction. “We’d be prepared to act reasonably and swiftly,” he said. Joel Mitnick, a partner at the New York law firm of Brown & Wood, who has followed the merger closely, said Klein’s comment opens up a more limited deal. “This clearly signals that this is the only acceptable way for the deal to go forward unchallenged by the government,” Mitnick said. Such a purchase would work great for WorldCom, which needs a wireless operation, said Tom Burnett, president of Merger Insight, a New York research firm. Yet that does not mean a deal is likely. Burnett said it would be tough for WorldCom to convince Sprint to part with a crown jewel. “Don’t think Sprint wants to sell off PCS,” Burnett said. “That makes the price WorldCom would have to pay prohibitively high.” Sprint PCS has a market capitalization of $56 billion. That is about $5 billion more than Sprint Fon Group, which houses all other company operations, including its long distance and Internet businesses. Yet the price for PCS would likely be much more than its market capitalization because of its high growth. Sprint PCS stock has risen 66 percent since the WorldCom deal was announced, and it is up 113 percent over the past 52 weeks. Other telecom properties have gone for hefty premiums. Global Crossing Ltd., for instance, agreed in February to pay a 119 percent premium for IPC Communications Inc. Also in February, TeleCorp PCS Inc. agreed to buy Tritel Inc. for a 73 percent premium. VoiceStream Wireless Corp. in September agreed to buy Aerial Communications Inc. for $2.96 billion, which represented a 63 percent premium. Even using the lowest of these multiples would value Sprint PCS at $91 billion. That price would constitute 70 percent of the amount that WorldCom was willing to pay for all of Sprint. Spokesmen for WorldCom and Sprint declined comment about a possible wireless transaction. If forced the drop the deal, both companies could find themselves in play. Deutsche Telekom AG, France T�l�com and Nippon Telegraph and Telephone Corp. all reportedly would like a U.S. market foothold. “The telecommunications industry is a global game, and there is no way a foreign company can be a top five global telecommunications company without securing a U.S. network,” said Eric Melloul, an analyst at the New York research firm Argus Research Corp. BellSouth Corp. also could renew its interest in Sprint. It lost a bidding war for the company in October to WorldCom. For its part, WorldCom could target VoiceStream Wireless Corp., which reportedly seeks a deep-pocketed suitor to bolster its bids for parts of the radio spectrum. The DOJ suit is a stinging indictment of a deal that top lawyers for the companies initially predicted would sail. WorldCom CEO Bernard Ebbers predicted victory in a January speech at the National Press Club. “There’s been a lot of speculation about the scrutiny, but the DOJ hasn’t taken up the case yet, the FCC hasn’t taken up the case yet,” Ebbers told reporters after the speech. “Where is the scrutiny? There’s been some public commentary or something like that, but that doesn’t really deal with the facts of the case.” At a November press conference, lawyers for the companies said they expected regulators to approve the deal without requiring the sale of the long distance business. The companies said when the agreement was unveiled in October, they planned to sell Sprint’s Internet backbone unit. The government, however, raised long distance as a major concern. Klein said consumers view WorldCom and Sprint, headed by CEO William Esrey, as substitutes. As a result, they freely switch between the two, depending upon price. This deal would eliminate that competition, he said. Klein also dismissed arguments that WorldCom and Sprint needed to merge to compete effectively with the “baby bells,” which are expected to move into the long-distance business. The antitrust chief said there is no guarantee the baby bells will actually do so, noting that currently only one baby bell offers long distance, and that only in New York. “When that occurs, then it would be time to consider this merger under those circumstances,” Klein said. Federal Communications Commission Chairman William E. Kennard lauded the Justice Department’s decision. “American consumers are better served if these companies continue to compete rather than combine,” he said. The FCC had not yet ruled. The next step is for a federal judge to inform WorldCom and Sprint when they must respond, Klein said. Throughout the litigation, Klein said the government would talk about a settlement. “We would be prepared to meet and discuss with the parties in private,” he said. Divestiture offers to date have not assuaged the government’s worries, Klein said. The companies have reportedly offered to sell Sprint’s Internet backbone and some of its long-distance business. “Anything proposed to us was not sufficient to protect consumers across markets,” Klein said. Mitnick, the antitrust lawyer, said he does not expect the companies to fight. “It would be a very, very difficult case for WorldCom to win,” he said. “The concentration in long-distance services and Internet access would be enormous, even by what some might see as lax antitrust standards in some big deals.” As announced, the deal was structured so WorldCom would exchange $76 in its stock for every share of Sprint Fon Group stock. That was a 33 percent premium. Sprint PCS shareholders would get one share in WorldCom PCS and .1547 shares of common stock. WorldCom also would acquire $14 billion of Sprint’s debt. Victorya Hong contributed from Brussels. Copyright �2000 TDD, LLC. All rights reserved.

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