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U.S. Files Lawsuit to Block WorldCom-Sprint Merger


WASHINGTON — In a move signaling that the recent wave of telecommunications mega-mergers may have reached its limits, U.S. antitrust enforcers filed suit Tuesday to block WorldCom Inc.'s proposed buyout of Sprint Corp.

The action was seen as a death blow to a $129-billion deal aimed at creating a telecom behemoth that would rival industry leader AT&T Corp. It came as Sprint and WorldCom withdrew a separate merger application to the European Union after facing stiff opposition from overseas regulators.

Antitrust officials on both sides of the Atlantic had widely criticized the proposed union. They argued that merging the world's No. 1 and No. 2 Internet backbone operators and the No. 2 and No. 3 long-distance carriers would create too powerful a gatekeeper on the global information superhighway and weaken competition in the U.S. long-distance market.

A WorldCom official who spoke on condition of anonymity said company lawyers were studying a provision in the merger agreement that requires Sprint and WorldCom to jointly litigate against any regulatory opposition if either party elects to fight.

Separately, a European Union official told reporters that Sprint and WorldCom might be able to modify their merger proposal to gain approval. But most analysts believe the deal is doomed in the face of the overwhelming regulatory opposition.

"If WorldCom were allowed to acquire Sprint, large and small businesses and millions of individual consumers would have to pay higher prices and accept lower service quality and less innovation," said Joel I. Klein, head of the Justice Department's antitrust division.

Just a few months ago, the merger was viewed by many as a done deal once the companies agreed to divest certain assets. But that changed over the last few weeks as regulators expressed unease and Sprint Chief Executive William Esrey stunned shareholders with a candid warning that the merger might not pass muster with regulators.

WorldCom, which in the last decade has grown from a little-known purveyor of long-distance phone service to a $37-billion telecom giant, said it will "promptly review its options with Sprint." Sprint issued a statement criticizing the Justice Department for allegedly changing the conditions required for approval.

"We are disappointed that we have been unable to convince the Justice Department that the merger is in the best interest of the American public and would advance competition," said Sprint general counsel J. Richard Devlin.

The proposed merger, under review for more than nine months, appeared to hit an impasse over the insistence of antitrust regulators that WorldCom and Sprint jettison both Sprint's Internet backbone facilities and most of its local and long-distance services.

That would leave WorldCom with only Sprint's much-coveted wireless service. That apparently was too high a price to pay for WorldCom's hard-charging chief executive, Bernard Ebbers, who built his firm through the purchase of MCI and 74 other companies during the last five years.

WorldCom shares rose $2.19 on Tuesday to close at $39.69, and Sprint fell $1.19 to close at $59.38, both on the New York Stock Exchange. The tracking stock for Sprint's wireless business--considered the main attraction for WorldCom--fell 36 cents to close at $61.14, also on the NYSE.

Mel Marten, an analyst at investment firm Edward Jones, said WorldCom shares rose because investors were relieved to see a resolution to the merger uncertainty. He said Sprint shares fell on the expectation that the company would have other suitors but would probably fetch a lower price than WorldCom's bid.

If the Sprint-WorldCom marriage is called off, it would be one of the few telecom deals to falter in a booming arena that has undergone a wave of consolidations since Congress passed deregulation legislation in 1996.

The federal law was supposed to produce greater competition and lower prices. But critics say it has mostly paved the way for a string of mega-mergers, including last year's $81-billion purchase of Ameritech Corp. by SBC Communications Inc. and the $65-billion union of Bell Atlantic Corp. and GTE Corp. this year that created Verizon Communications, the nation's largest local and wireless telephone company.

For that reason, a few analysts criticized the regulators' move as inconsistent with earlier reviews.

"There were risks with the long-distance and Internet businesses [at WorldCom and Sprint], but compared to what the regulators have already let go through in the local market . . . it's a bit unfair," said Roger Wery, director of the communications group at PRTM, a consulting firm in Mountain View, Calif. "There are lots of choices in long-distance, but there is no choice, as a consumer at least, in the local phone market."

Justice Department officials highlighted several areas of the WorldCom-Sprint deal that, if approved, would violate antitrust law.

The department said a combined WorldCom-Sprint along with AT&T would control about 80% of the U.S. long-distance market. A merger also would make WorldCom the Internet's primary gatekeeper by combining its 37% share of data traffic on the Internet's backbone with Sprint's 16%.

Collapse of the deal would leave WorldCom as the only major long-distance carrier without a significant wireless telephone operation. The company would also be without a direct link to homes of consumers, whose growing appetite for high-speed Internet access, wireless services and other add-on phone services are powering a telecom boom.


Times staff writer Elizabeth Douglass contributed to this report.

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