Why Sprint Could Afford To Hang Up On Eds

Sprint Corp. Chairman William T. Esrey certainly knows the value of keeping his options open. On June 7, just a day after the nation's No.3 long-distance phone company admitted that merger talks with Electronic Data Systems Corp. were dead, it revealed that it was close to inking a deal with France Telecom and Deutsche Bundespost Telekom, the German phone company. The goal? To build a worldwide telecommunications giant capable of competing with globe-girding rival AT&T and with MCI Communications Corp., which forged an alliance last year with British Telecommunications.

In the end, though, doing the European deal alone could be a boon for Sprint. It would immediately give the company a big boost in the international long-distance market, which is growing by 15% annually, three times faster than in the U.S. And France Telecom and DBP Telekom are expected to pour billions in hard cash into Sprint. Contends Howard Anderson, managing director of Yankee Group Inc.: "Esrey had two prom dates, and he picked the prettier one."

Sprint isn't releasing many details of the pending pact. It says its new partners would invest in Sprint through a new class of stock and that both would get seats on Sprint's board of directors. While the partners deny that a price has been worked out, Oppenheimer & Co. telecom analyst Michael Elling predicts the Europeans will plunk down $3 billion to $4 billion for up to 20% of Sprint--about a 20% premium on the company's $13 billion market value.

CONTINENTAL CALLS. That offer may have killed the EDS talks. Both sides had billed the deal "a merger of equals." But fearing earnings dilution, Sprint insisted that its shareholders receive 1.3 shares of stock in the new company for each Sprint share--while EDS shareholders were swapped gne-for-one. EDS refused to go for that. But analysts figure Esrey felt his position was strengthened by the Europeans' willingness to pay high.

Sprint and EDS could yet do a deal, of course. Sprint, for instance, may sign an outsourcing contract under which EDS would handle its billing and other data-processing operations--a deal Anderson believes would generate $6.4 billion in revenue for EDS over 10 years. EDS, in turn, could turn over its private telecommunications network to Sprint, a pact that could be worth $3 billion.

For now, though, Esrey will be turning his considerable energies to making sure his deal with the Europeans closes. The former Dillon, Reed & Co. investment banker has a penchant for playing hardball in negotiations, EDS only being the most recent example. When Sprint bought cellular-telephone provider Centel Corp. in March, 1993, for instance, it paid only $42 a share, even though analysts valued Centel as high as $65.

But Esrey may need this deal too badly to push very hard. Sprint is lagging behind MCI and AT&T internationally, and it lacks the domestic firepower, with only 9% of the U.S. long-distance market, to expand without partners. By combining with the Europeans, Sprint can expect a much higher number of calls from Germany and France to be routed onto Sprint's U.S. system. Moreover, the companies could offer one-stop shopping for global companies looking for help in managing their far-flung private phone networks. Sources close to the deal predict a detailed announcement by mid-June.

The pact would put Esrey firmly on the road to transforming Sprint into an international powerhouse. Just goes to show the value of having plenty of options to choose from.

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