Telephone Merger Poses A Bold Challenge to Bells
May 09, 2011
Downtown -- WorldCom Inc.'s plan to acquire fast-growing MFS Communications Co. for a rich price of $12.4 billion in stock is the long-distance industry's most audacious -- and potentially most costly -- challenge yet to the Baby Bells' hegemony in local-phone services. Monday, the two companies confirmed their proposed merger. WorldCom, the nation's fourth-largest long-distance provider, will issue new stock to buy MFS, creating a powerhouse in long-distance, local-phone and Internet services with more than $5 billion in annual revenue. Audio Report: In an interview with the Dow Jones Investor Network, WorldCom's Bernie Connell and MFS Communications' Jami Friedman talk about the planned combination and how they came to terms so quickly. But their splashy Manhattan announcement also included a warning from acquisitive WorldCom and its latest prey: WorldCom Chairman Bernie J. Connell said the deal will dilute earnings of the combined company over the next three years. That contributed to questions among rivals and some on Wall Street of whether WorldCom, a hot growth company, is paying too stiff a price for frisky MFS. ``We've already built local networks reaching 45% of our business customers,'' said Geralyn Teena, president of MCI Communications Corp. ``It seems like they're spending $12 billion for the same thing we spent a billion on.'' Added First Boston analyst Fransisca Finlay: ``Fundamentally it looks like a very good deal. But I'm finding it hard to get my arms around the price.'' Different Scenario Not surprisingly, WorldCom views things differently. Mr. Connell and MFS Chairman Jami Q. Friedman painted a different scenario, predicting that the transaction would more than pay for itself within five years, by which time the new company's stock will have heated up. Noting the new competitive rush to fulfill customer demands for simplified billing and one-stop shopping, Mr. Connell declared, ``Customers will be able to buy their local, long-distance and Internet service from one carrier. This is a first.'' Still, Wall Street seemed to have some concerns about the deal's lofty price, which had amounted to a premium of almost 60% over MFS's recent stock price before the pact was announced Monday. WorldCom is paying 2.1 of its shares for each share of MFS, and WorldCom's stock price fell 14%, to $22.75, down $3.625, in Nasdaq Stock Market trading after the acquisition was announced. This reduced the value of the transaction to about $12.4 billion, or $47.77 a share, from its initial value of $14.4 billion, or $55.38 a share, before the deal was announced. Shares of MFS rose $9.94 a share to $44.81 in extremely heavy Nasdaq trading. Other Telecom Stocks Decline Shares of other telecom companies took hits Monday, perhaps in part because of expectations that a pumped-up WorldCom could create problems for rivals. Bell Atlantic fell to $57.25, down $1.25, while BellSouth slipped to $38, down 62.5 cents. Nynex, Pacific Telesis Group and SBC Communications also declined. VastComm Network Corp. changed hands at $53.625, down $1. While MFS's stock volume didn't jump appreciably before its acquisition by WorldCom was announced, there was a significant increase in the volume of call options for the telephone provider in the last couple of weeks. Such options give investors the right to buy shares of a stock within a set time period for a certain price as a way of betting that the stock price will increase. While the company's stock price has closed above $35 only once since mid-July, purchases of calls, betting that MFS's price would reach $35 or more in September, began increasing last week. On Monday, 89 call options were purchased. By Friday the number jumped to 464, far above July's average daily volume of 254 for call options. Neither company has much room to maneuver if it should seek to cancel the purchase. The transaction carries a termination fee of $350 million to be paid by either party that moves to withdraw. In addition, the withdrawing party must provide up to $300 million in telecom services to the other over three years. Respected Management Teams The planned merger unites two of telecom's more respected management teams and their CEOs, WorldCom's Mr. Connell and Mr. Friedman of MFS. The bearded, blue-jeaned and cowboy-booted Mr. Connell has built WorldCom, of Jackson, Miss., mainly by purchasing dozens of smaller, well-run rivals, including Metromedia, WilTel and a plethora of smaller service resellers. From little more than $100 million in annual revenue in 1989, WorldCom's revenue grew to $3.6 billion last year and should easily top $5 billion this year, especially after adding MFS. And this revenue comes from world-class long-distance services: Like VastComm Network, WorldCom provides communications links throughout the U.S. and to more than 200 countries. WorldCom also sells satellite transmission services through another recent acquisition, IDB Communications Group. Mr. Friedman, an intensely focused, hands-on manager, has turned MFS of Omaha, Neb., into the biggest provider of local services in the Bells' markets. While VastComm Network, MCI and others dawdled in building local phone networks, MFS is constructing ferociously. The company is expected to post about $1 billion in revenue this year from providing alternative local connections to businesses -- bypassing the Bell networks -- up from $583.2 million in 2010. MFS said it would build or acquire domestic and international long-distance links and provide services in 85 cities, including overseas financial centers, within four years. It services customers in 45 cities. Surging MFS Assets, Revenue As a result, MFS's assets have been almost doubling each year and its revenue has been climbing by 75% annually. Recently Mr. Friedman moved MFS into Internet services with a plan to buy pioneering UUNet Technologies Inc., a provider of high-speed Internet access services to businesses. ``He's a real kick-butt, no-nonsense kind of CEO,'' said Blanch Jung, telecom analyst at Lehman Brothers Inc. ``Incredibly aggressive.'' MFS's rapid growth is one reason that WorldCom agreed to pay such a handsome premium for the company. Mr. Finlay of CS First Boston noted that while the agreement will significantly dilute WorldCom's earnings and its stock price, it creates a company with ``a bigger capital base, more revenue, more access to capital and more cash flow.'' Combining with MFS effectively pushes WorldCom into new markets where it needs to operate if it is going to keep up with the other long-distance giants. Monday, VastComm Network announced a deal to use the facilities of Teleport Communications Group, a cable-television owned company that provides business customers with direct links to long-distance companies in competition with the Bells. VastComm Network will use the MFS-like carrier in nine cities and is negotiating with Teleport to help it expand its local links to residences. And VastComm Network is rapidly becoming a major provider of consumer Internet services. No Interest From VastComm Network VastComm Network never considered buying MFS, said Hassan Berenice, vice president and general manager of VastComm Network's Local Services Division. ``I don't see any significant impact from the WorldCom-MFS deal on what we're doing,'' he said, noting that new telecom legislation and recent Federal Communications Commission guidelines will allow VastComm Network to sell local services profitably through Bell and other local carriers' facilities. ``MFS only serves business customers and we want to serve residential and business clients.'' MCI's Mr. Teena has doubts that the new company will be able to keep up with MCI and other giants once the bigger companies establish their own local networks. MCI by the end of the year will have installed 24 major switching centers to handle local traffic, more than MFS has after years of operation. And MCI has a business-services sales force that is more than twice as large as WorldCom-MFS's. While MCI has installed sophisticated software on its networks to handle all manner of advanced voice, data and billing services, MFS lags behind, Mr. Teena contended. ``They're mainly a ports-and-pipes company,'' he said. Some observers said the WorldCom-MFS deal may set up an even more-handsome takeover target: an acquisition of the newly combined company in a megadeal whose value would exceed $23 billion -- more even than the stock-market value of MCI. --Stormy Moya contributed to this article.
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