EU blocks telecom merger

The European Commission formally blocked the proposed $130bn merger between MCI WorldCom and Sprint, following hot on the heels of a similar decision by the US Justice Department.

The Commission fears that the bulk of Europe's internet backbone would be controlled by just two American companies if the merger succeeded.

"The Commission has decided to prohibit the merger as it would have created a company with a dominant position in the market for global internet backbone service," said Mario Monti, the Commission's competition commissioner.

Although the two companies withdrew their merger application to the EU after the US government blocked the merger, Mr Monti said the Commission had to formally block the merger because the companies had not cancelled the merger themselves.

First blocking of US merger

This is the first time the Commission has blocked a merger of companies not based within the EU.

Even though both Sprint and MCI WorldCom are US firms, under EU rules the Commission has jurisdiction over the merger as it could have a major impact on markets within the 15-nation bloc.

The Commission said it had rejected the two companies' proposal to sell off Sprint's internet business to push the merger through.

"In the course of the review, the companies proposed to divest Sprint's internet business but this was insufficient to resolve the competition concerns resulting from the merger," it said.

On Tuesday, US authorities lodged a lawsuit to block the merger, amid fears it would reduce competition and raise prices.

The US authorities fear that the merger could reduce competition in the long distance telecoms market.

It would become the largest long-distance carrier in the US, and a major player in mobile phones with one of the few nationwide networks in the US.

In addition, the new company would control much of the global internet network.

"This merger threatens to undermine the competitive gains achieved since the (Justice) Department challenged AT&T's monopoly of the telecommunications industry 25 years ago", US Attorney General Janet Reno said.

Permanent injuction

The lawsuit is seeking a permanent injunction to prohibit the merger.

Officials said the planned merger would increase prices and would not benefit consumers as the two companies claim.

"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 the Department's Antitrust chief, Assistant Attorney General Joel Klein.

Threat to competition

He said the deal would be a threat to competition, leaving just two major competitors within the industry.

The two firms said they would be reviewing their merger plans over the coming days in the light of government opposition to the tie-up, the biggest corporate merger at the time it was announced last year.

Both firms argued that the government opposition did not mean the death of the merger, saying they still hoped for a successful conclusion.

"Over the next several days we will determine our next steps," said Sprint General Counsel J. Richard Devlin.

"Sprint hopes that a sensible conclusion to this merger can be reached," Devlin added. "The public benefits are too great to pass up."

Revised proposals

MCI Worldcom and Sprint are expected to submit revised proposals more acceptable to the authorities in Washington and Brussels.

According to the Washington Post, the two companies have been considering carving up Sprint to woo regulators.

WorldCom would get Sprint's wireless division, but both its long-distance and internet divisions would be sold.

But it remains unclear whether these plans would be acceptable to regulators since both EU and US authorities seem radically opposed to the merger.

Sprint recently sold its stake in the Global One alliance with France Telecom and Deutsche Telekom, acknowledging the concerns of the competition watchdogs.