The deal marks the largest corporate merger ever and will create a telecommunications titan able at last to take on market leader AT&T on relatively equal terms.
The new company--which will be called WorldCom--will claim about 35 percent of the long distance market, close to AT&T's roughly 42 percent, according to analysts' estimates.
The buyout ends the high-stakes bidding war, which began when local telephone company BellSouth got wind that MCI WorldCom was making an offer to acquire Sprint, its long distance rival. After marathon negotiations, Sprint's board of directors finally accepted MCI WorldCom's sweetened offer last night.
"This merger is about a lot more than wireless. The combination of Sprint and MCI WorldCom creates nothing less than the most dynamic, most creative, most growth-oriented company in the world," said MCI WorldCom chief executive Bernard Ebbers. "This merger is about growth."
The merger is the latest example of rapid consolidation in the telephone industry, brought on by deregulation and the convergence of voice, video, and data services. Most regional Bell phone companies--with the notable exception of BellSouth--have combined, and long distance carriers such as MCI WorldCom have been aggressive in corporate buyouts as well.
By accepting MCI's offer, Sprint gains an innovative partner, analysts said.
"I think Sprint was looking to align with a player known for its aggressive behavior," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "Any company in this business is looking at high growth in the Internet and data sides, and looking to shed slow growth assets. Joining with a Bell [local phone company] would be the opposite of that."
Executives said the merger positions the companies together to battle increasingly larger competitors, including the recent Baby Bell combinations.
"Each of us had a chance to go it alone, but together we will be more effective competitors," said Sprint chief executive William Esrey. The combined company will soon offer a full bundle of telecommunications services--key to competing in the future, he added.
The total value of the deal, which had been expected, is about $129 billion and will involve the exchange of about $115 billion in common stock and another $14 billion in debt and preferred shares. The new company will have more than $50 billion in revenue and about 140,000 employees worldwide.
As a result of the deal, MCI Worldcom will have to digest $102 billion in charges against earnings over the next 20 years, a spokesman told Bloomberg. That will result in just over $5 billion in charges per year over the 20-year period. The MCI spokesman said the charges were the largest ever, the report said.
The deal values Sprint's phone business at about $76 per share. Under the terms of the agreement, each share of Sprint PCS Group will be exchanged for one share of a new WorldCom PCS tracking stock and 0.15 shares of MCI WorldCom stock.
"The economics of the combination are particularly compelling," Ebbers said. "The merger with Sprint is particularly timely as wireless communications emerges as a critical component of full service offerings."
MCI WorldCom sought Sprint largely because of its national wireless phone network, analysts said. MCI WorldCom will now provide services to Sprint's 4 million PCS wireless subscribers and 1.7 million paging and advanced messaging customers.
Building an empire
|October 1999||Captures a wireless division.|
|Wins a paging service with 1.7 million subscribers.|
|September 1998||Catapults into No. 2 long distance position.|
|January 1998||Keeps data network, trades subscribers to AOL.|
|December 1996||Captures leading Net backbone UUNet and other local networks.|
MCI WorldCom said it will also offer a nationwide broadband access alternative to both cable and traditional phone service through a combination of high-speed digital subscriber line (DSL) facilities and fixed wireless access using the combined company's nationwide MMDS spectrum.
Ebbers will retain the position of chief executive officer of the new company, and Sprint's Esrey will become chairman.
The deal must first, however, clear some high regulatory hurdles. Federal Communications Commission chairman William Kennard said last week that he would give a Sprint-MCI WorldCom merger close scrutiny and hinted that the companies would likely have to shed some assets to win approval.
Most analysts said the combined companies would have to sell Sprint's extensive Internet backbone, much as MCI sold off its Net assets when it merged with WorldCom.
But executives today said they would not have entered into the agreement unless they felt confident they could prove to federal regulators that the merger is in the best interests of consumers.
If all goes well with regulators and shareholders, executives of both companies anticipate the merger to close in the second half of next year. The deal calls for a $2.5 billion breakup fee should either company wish to accept another offer.
Although spurned by Sprint, BellSouth still could seek parts of the long distance carrier's business, particularly if regulators force the combined company to divest certain assets.
BellSouth raised its initial offer for Sprint yesterday in its unsuccessful attempt to outbid MCI WorldCom, according to reports.
Today BellSouth confirmed that it had been in talks with Sprint about a possible combination, but that those negotiations had concluded.
"We owed it to our shareholders and employees to explore this opportunity," said BellSouth CEO Duane Ackerman in a statement.
Art of the deal
To boost its wireless strategy, MCI WorldCom earlier this year had considered buying cellular phone carrier Nextel--a deal that could have been worth as much as $13 billion.
But when Sprint executives heard about the talks, Sprint chief executive William Esrey decided to call MCI WorldCom's CEO himself, Esrey said in a conference call announcing the megamerger today.
The value of today's merger is considerably more expensive than the ill-fated Nextel deal, which failed, in part, due to the high level of debt MCI WorldCom would have had to assume, Ebbers said during a press conference today.
Sprint executives stepped in during negotiations and suggested that MCI WorldCom sell mobile services from Sprint's PCS group under the MCI brand.
But, although not privy to the talks, industry observers suggested Ebbers may have jumped from resale talks to the topic of a full-blown acquisition of Sprint.
"Bernie doesn't like resale deals, that's not his style. He likes to own it all," said Mark Winther, group vice president for worldwide telecommunications at International Data Corporation.
According to Esrey, the executive finalized some of the details of the merger with Ebbers over a satellite telephone while riding horseback in Colorado.
News.com's Corey Grice and Bloomberg contributed to this report.