WorldCom, Sprint may offer to divest for merger approval

The offer, being studied by both companies, is intended to allay regulators' concerns that the combined company would control too much of the Internet transmission business and U.S. long-distance market, the people said.

Long-distance giant WorldCom wants to acquire Sprint's PCS Group wireless network to offer its customers wireless services, as more people use phones and mobile devices to access the Internet.

While WorldCom "would love to get Sprint's long-distance business...that's not really why they're trying to buy Sprint," said Peter Friedland, an analyst at WR Hambrecht in San Francisco. He said he's not sure Sprint would be willing to go along with the divestitures.

Both companies would have to approve the plan before making the offer to antitrust officials in the U.S. Justice Department and the European Union, one person said.

The Financial Times earlier reported that the plan was in the works.

"I'd be quite surprised if WorldCom basically had to gut out all of Sprint's long-distance operations to acquire the company," said Richard Klugman, an analyst at Donaldson Lufkin & Jenrette. "That's a hefty price to get into the wireless business."

European regulators have said they are worried the combined company would have too much control of Internet transmission on the continent. Mario Monti, the European competition commissioner who arrived here today, has recommended that the European Commission block the deal, people said.

Justice Department lawyers also are concerned the combination would stifle long-distance telephone competition, people familiar with the situation said. WorldCom and Sprint expect to know within two weeks whether the agency will sue to halt the transaction.

WorldCom "rolled the dice trying to pursue this merger, and it looks like they're going to lose," said J. Michael Gallipo, manager of the Monument Telecommunications Fund, which owns about 19,000 WorldCom shares.

That would be a blow to WorldCom chief executive Bernard Ebbers, the former high school gym teacher who built the No. 2 U.S. long-distance phone company by buying more than 75 companies in about five years.

"This would be the first time (Ebbers) has ever lost a big deal," Gallipo said.

Both companies are expected to seek other partners if the plan collapses, analysts said. WorldCom is likely to shop for a wireless company such as Nextel Communications or VoiceStream Wireless. WorldCom and Sprint also could be takeover targets for companies such as Deutsche Telekom, analysts said.

WorldCom and Sprint executives have met with Justice Department lawyers since staff members recommended to antitrust chief Joel Klein that he block the merger last month, people familiar with the case said.

Sprint chief executive William Esrey said last week that it was "unclear" whether U.S. antitrust enforcers would approve the merger. Sprint and WorldCom declined to comment.

During a six-day Washington visit, Monti is expected to meet with Klein to discuss his recommendation,

The European Commission, the EU's executive agency, has been reviewing the merger since January. After a one-month study, the commission in February extended its investigation by four months.

Amelia Torres, Monti's spokeswoman, said "a decision is on the table" and that antitrust experts from the 15 EU countries will meet in Brussels tomorrow to review the staff's decision.

The advisory committee, which meets on any in-depth merger review, will give a nonbinding recommendation to the 20-member European Commission. The full commission could reject the antitrust staff's proposal, although that has never happened. The commission usually makes its decision at a weekly Wednesday meeting one or two weeks before the review period ends.

The EU has repeatedly cited concerns about the combination's potential gatekeeping effect on Internet access and its potential to dominate the sale of phone services to large corporations. WorldCom and Sprint still have a chance to propose the necessary concessions to ease EU worries, a person familiar with the situation said.

If regulators block the combination, neither would pay a $2.5 billion breakup fee, which is triggered if either company cancels the deal, not if regulators fail to approve, according to a filing with the U.S. Securities and Exchange Commission.

Only a few companies provide so-called Internet backbone service--WorldCom, Sprint, Cable & Wireless and GTE--according to the commission.

Many experts think that if WorldCom agreed to sell its UUNet Technologies unit, it might succeed in winning over the commission. Ebbers has ruled out selling the world's largest provider of Internet backbone services.

In 1998, WorldCom was required to sell some Internet assets to win U.S. approval of its $37 billion purchase of MCI Communications, then the second-largest U.S. long-distance phone company.

Cable & Wireless, the United Kingdom's No. 2 phone company, bought MCI's Internet backbone business and then sued WorldCom last year, accusing it of failing to transfer the customers or fulfilling the EU commitments. WorldCom agreed in March to pay $200 million to Cable & Wireless to settle the lawsuit.

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