Early setback for Deutsche Telekom's Sprint talks

Preliminary merger talks between Deutsche Telekom and Sprint have been put in the shade yesterday by US senators who have voiced strong opposition to the takeover of US groups holding Federal Communications Commission licences by foreign government-owned companies.

Informal contact between Deutsche Telekom and Sprint began following the blocking of the latter’s takeover by WorldCom, although WorldCom and Sprint have not yet formally called off their deal, limiting the extent to which either side can pursue alternative mergers.

The ability of Deutsche Telekom to complete any takeover of Sprint has been cast into doubt, however, by a letter William Kennard, chairman of the FCC, from Senator Ernest F Hollings, endorsed by both Republicans and Democrats, and reported in the Wall Street Journal. The letter claimed that such a takeover would be “contrary to US law and inconsistent with our policy to promote competition and maintain a secure communications system for our national security.”

Senator Hollings reminded the FCC that US law did not allow the ownership of FCC licences to companies more than 25 percent owned by a foreign government.

Initial talks between the German telecoms giant and Sprint could lay the groundwork for the biggest European acquisition to date of a US company, and the two companies will be encouraged by precedents of the FCC waiving restrictions on occasion in the past, although never on such a large acquisition.

Based on current share prices, Sprint and Sprint PCS, its wireless unit, are worth just under $100bn. It would also be the first time a European telecoms company had broken into the world’s largest communications market on a national scale, following British Telecom’s failed attempt to buy long-distance carrier MCI three years ago.

Both Sprint and Deutsche declined comment on the talks on Sunday. However, Ron Sommer, Telekom’s chief executive, said in an interview with the weekly Bild am Sonntag: “Our next focus is in the US, and we are clearly talking about an acquisition, not a loose alliance.” A Deutsche purchase of Sprint would leave questions hanging over both Qwest, a US long-distance carrier that the German group tried to buy earlier this year, and WorldCom itself.

Qwest’s own $40bn purchase of US West was completed late on Friday, removing the main obstacle to a deal with Deutsche. One person close to Qwest suggested that any contact between the German company and Sprint did not necessarily rule out a Deutsche-Qwest deal, but might reflect an attempt by Deutsche to persuade Qwest to accept a lower price for a takeover.

Deutsche still owns 10 percent of Sprint, as does France Telecom, a legacy of their three-way alliance that collapsed last year. If the German group were to make an offer for Sprint, it would not need to find cash or issue its own stock up the full $100bn. Since Sprint PCS is covered by a tracking stock, the German company could simply reissue a new tracking stock to that company’s shareholders, along with a small premium – a technique that WorldCom had also planned to use. Reuters