In what is set to be the world’s largest-ever corporate takeover, MCI WorldCom Inc yesterday announced an enormous deal to acquire Sprint Corp for $129bn. The sheer size of the deal saw off rival bidding from BellSouth Corp. MCI WorldCom maintains that it can justify the size of the deal, which has the backing of both boards, with the promise of great synergies from joining the second and third largest players in the US telecoms industry to more closely rival AT&T Corp.
The deal is the result of months of less than secret negotiations which began when Sprint CEO William Esrey called MCI WorldCom CEO Bernard Ebbers over a possible tie up relating to Sprint’s wireless offering. The merger, expected to close at the end of next year, will create a company that would have pro forma revenues in 1999 of more than $50bn, and a market enterprise value of around $290bn.
In a hectic past two days, Sprint’s long running talks with MCI WorldCom were interrupted by bidding from BellSouth Corp, but yesterday the regional bell operating company looked to have admitted defeat – after driving up the price its rival will pay for Sprint. However, MCI WorldCom remains wary of the potential for a rival suitor for Sprint, and deal includes a sixty-day quiet period prior to the deal closing as well as a $2.5bn break- up fee.
For its offer MCI WorldCom will boost its US network holdings while finally adding wireless coverage to its US offerings. It will also move into the local market with Sprint’s sizable incumbent local network units. Although the post merger company will just be called WorldCom, the company says it will continue to use the MCI and Sprint brands.
Under the agreement, each share of Sprint FON Group will be exchanged for $76.00 of MCI WorldCom common stock, subject to a collar. In addition, each share of tracking stock unit Sprint PCS will be exchanged for one share of a new WorldCom PCS tracking stock and 0.1547 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint PCS and will track the performance of the company’s PCS business. As well as the $115bn in equity MCI WorldCom will also assume $14bn in debt and preferred stock.
MCI WorldCom believes it can justify the huge price for Sprint with projected annual cash operating cost savings of $1.9bn in 2001, increasing to $3.0bn annually by 2004. Capital expenditure savings of $1.3bn a year are expected in 2001 and beyond, primarily as a result of economies of scale and procurement efficiencies.
As part of the merger agreement the two companies are looking to fill out their offerings long before the deal closes. WorldCom will start reselling Sprint’s PCS wireless offerings under its own brand in about three month’s time. Effectively killing its role in the GlobalOne alliance, Sprint will also start reselling MCI WorldCom’s international services alongside its current GlobalOne offerings. In a third agreement, Sprint will become one of the largest MCI WorldCom customers by halting its plans to build out metropolitan networks in the US and instead taking up capacity on MCI WorldCom’s own networks.
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The deal will have to win clearance from a number of regulators at state, federal and international level. Yesterday FCC chairman William Kennard, however, did not react favorably to news of the merger. He maintained American consumers are enjoying the lowest long distance rates in history and the lowest internet rates in the world because of the competition in the market. He warned that the companies bear a heavy burden to show how consumers would be better off.
Ebbers said he had spoken with Kennard since the comment and that the FCC chairman had promised to keep an open mind in the FCC’s planned investigation. Ebbers added the company would not have embarked on the deal unless it believed it could win regulatory backing. In an echo of the deal that formed MCI WorldCom, the merger is likely to face a compulsory sale of Sprint’s internet backbo
ne business.
Following the merger, Ebbers will remain president and CEO of the combined company while Sprint CEO William Esrey will become chairman. The collars on the deal will see MCI WorldCom committing to pay not less than 0.9400 shares if MCI WorldCom’s average stock price exceeds $80.85 for a period prior to the closure of the deal or more than 1.2228 shares if MCI WorldCom’s average stock price is less than $62.15. Yesterday, MCI WorldCom closed at down 5.50% at $67.6875, while Sprint FON closed at $59.9375 and the PCS unit stock closed down 5.48% at $74.375.
