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. Last Updated: 07/27/2016

Regulator Queries Deal Benefits

WASHINGTON -- A year after declaring the long-distance industry one merger away from being too concentrated, the nation's top telephone regulator cast an immediate shadow over the proposed marriage between the No. 2 and No. 3 leaders in the field.

Federal Communications Commission Chairman William Kennard caught some industry leaders and experts off guard Tuesday by openly questioning the value to consumers of a $115 billion proposed deal between MCI WorldCom and Sprint.

He called the deal "a surrender," and said the companies "will bear a heavy burden to show how consumers would be better off."

That's not the only place the two telecommunications giants will have to make their case.

Some top antitrust lawmakers echoed Kennard's comments, and said that they would be watching the mammoth deal.

"The burden will be on MCI WorldCom and Sprint to show that consolidation in the long-distance sector of the market - a sector which, until now, has been extremely competitive - will benefit consumers," said Senator Mike DeWine of Ohio, chairman of the Judiciary antitrust, business rights and competition subcommittee, and the subcommittee's top Democrat, Senator Herb Kohl of Wisconsin.

The Justice Department will review the merger for any possible antitrust violations. One issue likely to be of concern is whether there are viable long-distance competitors, said Steve Sunshine, a partner in the Washington office of Shearman and Sterling.

"The Justice Department and the FCC has to conclude that there is still a long-distance market," he said. Otherwise, he added, a merger that brings the industry from three down to two players will raise significant concerns about the state of competition.

"I don't think that MCI and Sprint would get this close to the altar if the chaplain was going to back out," said Nicholas Allard, a communications lawyer at the Washington firm Latham and Watkins. "The FCC chairman has put his finger on the ultimate question - is this deal good for consumers?"

In June 1997, then-FCC Chairman Reed Hundt put a much firmer hold on merger discussions between AT&T Corp. and SBC Communications, the regional Bell telephone company. Hundt declared such a combination "unthinkable." Soon after, talks between the two companies dissolved.

"This is a more measured response," Sunshine said.

MCI and Sprint are just the latest byproducts of a 1996 law - meant to spur local and long-distance companies to compete against each other - that has created an unprecedented wave of telephone and media mergers. Together, MCI and Sprint would control 36 percent of the $110 billion U.S. long-distance market, second only to AT&T's 43 percent.

But the 1996 Telecommunications Act also allows regional Bell companies to get into long distance. If enough Bell companies do so, this could reassure regulators that there is adequate competition in the industry.

The merger is opposed by some consumer groups and the Communications Workers of America.