WASHINGTON-An uncertain wireless industry realignment could be in store as a result of Justice Department’s rejection last week of the WorldCom Inc.-Sprint Corp. merger and new legislation forbidding foreign government ownership of U.S. telecommunications firms.
“Instead of two wireless players for international buyers, you now have three,” said David Freedman, a Bear Stearns & Co. analyst.
Indeed, the dramatic collapse of the WorldCom-Sprint deal leaves Sprint PCS, Nextel Communications Inc. and VoiceStream Wireless Corp. as the remaining independent wireless carriers that combine broad geographic coverage with heavy debt.
Some observers see Nextel as a likely candidate for takeover by WorldCom, despite the fact that WorldCom and MCI Communications Corp. (before merging with WorldCom) previously walked away from talks with Nextel.
Nextel’s emphasis on business wireless communications would work especially well if WorldCom decides to ditch the consumer market and concentrate on the business sector as has been speculated. Though Nextel has a bigger wireless footprint than VoiceStream, the firm’s lack of spectrum could become a big problem insofar as accommodating new subscribers and Internet data applications in the future.
Moreover, Nextel would be far more expensive to buy than it was when WorldCom was in negotiations with the Reston, Va., firm a year and a half ago. Recent racial discrimination complaints filed against Nextel with the Equal Employment Opportunity Commission complicate matters further, given the possibility that any Nextel deal could draw the attention of organized labor and civil rights groups.
Freedman said WorldCom could choose to partner with an existing wireless carrier that plans to bid on 700 MHz third-generation mobile phone spectrum. It was suggested that WorldCom may not want to rush into another wireless deal in what’s been described as a speculative market.
Another scenario is that WorldCom could put itself up for sale.
As for Sprint, German telecom giant Deutsch Telekom AG and BellSouth Corp. have been widely mentioned as potential suitors.
“Deutsche Telekom is buying somebody in the U.S. They have the money, they have the will and they’re shopping … And they covet Sprint’s wireless business,” said Scott Cleland of the Precursor Group, an independent research company.
Deutsche Telekom already owns 10 percent of Sprint.
But as likely as a Deutsche Telekom-Sprint deal might appear, such a transaction potentially faces a big hurdle. His name is Sen. Ernest Hollings (D-S.C.), ranking minority member of the Senate Commerce Committee.
Last week, Hollings-joined by Sens. Daniel Inouye (D-Hawaii), Jay Rockefeller (D-W.Va.), John Kerry (D-Mass.) and Byron Dorgan (D-N.D.)-introduced legislation to ban firms more than 25 percent foreign government-owned from buying U.S. telecom carriers.
“While our efforts to foster competition have benefited consumers, these efforts have depressed the earnings and stock prices of U.S. domestic providers. However, many of our foreign counterparts have consistently worked to provide advantages for their government-owned companies,” said Hollings.
In addition to competitive issues, Hollings said he believes national security should be factored into the equation.
“We all agree that telecommunications services are important for national security concerns. To permit a foreign government to own such assets would raise too many troubling questions,” said Hollings.
Deutsch Telekom and France Telecom are both majority-foreign government owned and both reportedly are eying U.S. telecom firms.
In pursuing the legislation, Hollings said the U.S. would not be alone. The South Carolina Democrat noted that Spain, Italy and Hong Kong have taken steps to protect their domestic market from foreign government-owned telecom service providers.
On another level, the Justice Department’s suit against the WorldCom-Sprint deal signaled there are limits to the size and scope of telecom mergers it is willing to approve. Until now, the Justice Department has signed off on virtually all telecom mergers-several involving Baby Bell combinations-brought before it.
But Justice officials clearly viewed the proposed marriage of the second- and third-largest long-distance carriers as crossing the line.
“This merger threatens to undermine the competitive gains achieved since the department challenged AT&T’s monopoly of the telecommunications industry 25 years ago,” said Attorney General Janet Reno. “It is critical to our economy that we preserve competition for services that so many of us rely upon in our everyday lives-long distance calls, data network services and Internet connections.”
Having sued to kill the WorldCom-Sprint deal and successfully litigated the breakup of computer software giant Microsoft Corp., the future makeup of Justice’s antitrust office could become an issue in the future.
The high-tech industry has increased its political clout, and Democrats and Republicans this election season have gone to great pains to curry favor with telecom firms and Silicon Valley.
Federal Communications Commission Chairman William Kennard said Justice’s action preserves competition and protects consumers.
