WorldCom's Ebbers running out of options

With regulators in the US and Europe nearly set to reveal their decision on WorldCom's proposed acquisition of Sprint, WorldCom CEO Bernard Ebbers appears to have only two options left, experts say.

He can either agree to spin off all of Sprint's core network services except wireless and local networks. Or he can just call the merger off.

Analysts say Ebbers is up against a wall as European Competition Commissioner Mario Monti -- the European Union's equivalent of the chairman of the FCC -- comes to the US for final talks with regulators and the merger partners.

The EU is reportedly set to vote down the merger even if WorldCom spins off Sprint's internet backbone as it originally proposed. EU officials -- as well as key US Justice Department officials -- reportedly want any party that might buy Sprint's internet business to fortify itself with Sprint's complete long-distance network and portfolio of long-distance voice, frame relay and ATM services.

"Bernie's got himself into a real pickle," says Berge Ayvazian, president of the Yankee Group. Ebbers' original move to spin off only Sprint's internet backbone isn't impressing the European regulators because the Europeans consider WorldCom's 1998 spinoff of the former MCI internet business to Cable & Wireless to have been a nightmare.

"They're trying to fix something that didn't get fixed the last time they approved a Bernie Ebbers merger," Ayvazian says. He rates WorldCom/Sprint merger approval under any conditions a 50-50 proposition.

A WorldCom spokesman would not comment on whether WorldCom is considering a move to spin off all of Sprint's long-distance networks except wireless to get the merger done. But others say WorldCom's own sales reps have been passing the word that merger talks have moved in this very direction.

"That came up in a negotiating meeting with local branch managers with MCI WorldCom," says Dick Kuehn, president of RAK Associates, a Cleveland firm that negotiates carrier contracts for users. "They said we're looking at getting rid of everything (from Sprint) except wireless."

A compromise solution is still a remote possibility, say some analysts. WorldCom could attempt to spin off just Sprint's consumer long-distance business plus the internet backbone while retaining its traditional business voice and data services. Or it could sell all of Sprint's long-distance networks but lease back parts -- such as ports on Sprint's frame relay and ATM networks -- while retaining the data customer relationships.

The problem with both those proposals is that Sprint actually contributes greater market concentration to WorldCom in the classic enterprise data services than anywhere else. For example, although Sprint holds only 9 per cent of the US voice market and 4 per cent of the retail internet access business, it controls about a quarter of the US frame relay and ATM market share.

A potential spinoff of multiple Sprint services, including frame relay and voice, to an unknown third party could leave Sprint customers even more nervous than a WorldCom fusion, "because they wouldn't know where they're going or why", Kuehn says. On the other hand, he says such a scenario could be ideal for non-Sprint customers, who would retain the option to negotiate contracts with both WorldCom and whichever carrier buys whatever Sprint spins off.

The possible collapse of the WorldCom/Sprint merger leaves Sprint CEO William Esrey with numerous problems whether Sprint remains intact or gets sold to someone else, Ayvazian agrees. The company has recently lost several top executives, he notes. "They've got a huge morale problem," Ayvazian says. "He's got to put the company together again."

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