The entire Wall Street Journal Article
WorldCom to Launch MCI Bid
To Rival British Telecom's Pact
New Offer May Spur Battle
For Major Long-Distance Firm
By STEVEN LIPIN and JOHN J. KELLER
Staff Reporters of THE WALL STREET JOURNAL
WorldCom Inc. launched a blockbuster $30 billion takeover bid for MCI
Communications Corp. Wednesday in an attempt to wrest control of MCI
from its would-be owner British Telecommunications PLC.
The stock deal, which values MCI at $41.50 a share, a 41% premium to
MCI's closing stock price Tuesday, threatens BT's revised $18 billion pact
to purchase the 80% of MCI shares it doesn't own. The unsolicited offer
could set the stage for a battle for the No. 2 ranked U.S. long-distance
phone concern -- something BT clearly didn't expect when it reduced the
price it would pay for MCI.
WorldCom's bid of $41.50 a share in stock tops the $34 a share British
Telecommunications agreed to pay for MCI.
The transaction will be accounted for as a
purchase and will be tax-free to MCI holders.
The deal is expected to increase Worldcom's
earnings by up to 22% in the first year after
closing.
The number of Worldcom common shares to
be exchanged for each MCI share will be
determined by dividing $41.50 by the 20-day
average of the high and low sales prices for
Worldcom common stock prior to closing of
the exchange offer, but will not be less than
1.0375 shares, if Worldcom's average stock
price exceeds $40, or more than 1.2206
shares, if the average stock price is below $34.
Following closing of the exchange offer,
WorldCom will effect a second-step merger
with all remaining MCI holders receiving the
same per share consideration of $41.50.
The deal would require approval from the U.S. Federal Communications
Commission and MCI and WorldCom shareholders.
Nonetheless, Worldcom President and Chief Executive Bernard J. Ebbers
said, in a letter to MCI, that he expects the deal to close no later than the
first quarter.
For WorldCom, a scrappy phone concern that currently is the
fourth-biggest long-distance player, the MCI acquisition would catapult it
into a strong second place behind AT&T Corp. MCI's long-distance assets
would be joined with WorldCom's local phone and Internet businesses.
Indeed, if WorldCom succeeds in taking over MCI -- a big if -- it would
have the broadest collection of assets in the industry for competing on all
telecom fronts.
Brooks Fiber Deal Set
Also on Wednesday, Worldcom announced an agreement to acquire rival
local-exchange carrier Brooks Fiber Properties Inc., boosting the
company's local business. Worldcom valued the deal at $2.4 billion, plus
outstanding debt obligations.
WorldCom said each Brooks common share will be exchanged for 1.65
WorldCom common shares. The transaction is structured to qualify as a
pooling of interests.
In a separate press release, Brooks Fiber said it valued the transaction at
about $2.9 billion, or $58.37 a Brooks Fiber share, based on the price of
WorldCom common shares at the close of the market on Sept. 30.
The company said the merger will expand the number of all fiber optic local
networks and switching facilities it operates in the U.S. to 86 from 52.
WorldCom said the majority of the Brooks' markets are in cities that
WorldCom didn't have local facilities already established.
An acquisition of Brooks, based in St. Louis, WorldCom round out its local
networks, analysts say. Founded in 1993, Brooks is one of a handful of
"competitive local exchange carriers," or c-lecs, that have jumped into the
local phone market by building local networks for predominantly business
users. Last year, WorldCom purchased the biggest c-lec, MFS
Communications, for $14 billion in stock.
Stunning Reversal Possible
For BT, if WorldCom succeeded in acquiring MCI it would be a stunning
reversal after a year of trying to complete the biggest cross-border merger
in history. The loss of MCI could seriously impede its efforts to expand
globally, especially in the critical U.S. telecom market.
A WorldCom/MCI combination would create a company with more than
$27 billion in annual revenue. Though WorldCom brings only about $7
billion in annual revenue, the company's growth rate and mix of businesses
gives it a market capitalization of $33 billion, giving the Jackson, Miss.,
company a powerful currency to make a bid. How the stock market reacts
could ultimately determine the company's success.
The bold gambit by WorldCom and CEO Mr. Ebbers stems from BT's
decision in late August to lower the price for MCI by about 25%. The
lower price came after the Washington, D.C., carrier reported a
disappointing slide in its core long-distance business and projected widening
losses from its effort to enter to U.S. local phone market.
MCI's second-quarter results fell far below expectations, and now some
analysts are saying its third quarter won't be any better. Senior executives of
MCI and BT have been squabbling over whether to attack the Bell market
aggressively and increase spending on the effort or to hold the line on
spending, thereby shoring up MCI's earnings.
WorldCom might not face the same issues with an MCI purchase. Much of
WorldCom's local phone investments have been made, or would be
strengthened with a Brooks deal.
MCI Approved Initial Pact
MCI shareholders approved the original merger pact earlier this year before
BT negotiated to cut the price it would pay. As a result, MCI needs
shareholder approval again and is preparing for a second vote on the new
merger terms. Specifically, MCI needs 50.1% of the shares outstanding to
vote in favor of the revised merger pact.
Given that BT owns 20% of the shares
outstanding and obviously will vote in favor of
its own accord, WorldCom can try to thwart
approval if it can persuade enough investors to
vote against the plan.
Given the price-cut, BT probably never thought it would have competition
for MCI. And while it could obviously raise its bid given its own financial
might, that would probably anger its own investors, many of whom
pressured BT to cut the price in the first place.
Break-Up Fee $450 Million
Under the terms of the merger accord, the transaction can be terminated
under various scenarios, including mutual consent by the boards of the two
companies. In addition, it can be terminated if MCI or BT shareholders
don't approve the pact; if the boards withdraw their recommendation; if a
superior proposal is presented and approved by the board. Under that
scenario, MCI -- or its new merger partner WorldCom -- would have to
pay BT a "break-up" fee of up to $450 million.
The merger pact says if MCI receives an unsolicited bid that is viewed as a
"superior" offer by its advisers, MCI would have the obligation to consider
its fiduciary obligation to shareholders.
An MCI acquisition would create a behemoth in the telecom world. Mr.
Ebbers moved quickly to structure the company so that it can capitalize on
the two biggest problems currently facing world-wide telecom service
providers: a shortage of capacity and the explosion of demand for data
services.
First Mr. Ebbers expanded his long-distance customer base and network
operations by buying numerous rivals. One in particular, WilTel, gave him a
high-capacity fiber-optic network that he has since expanded through
WorldCom's own internal construction and by buying capacity on other
networks, such as the super network currently being built by Qwest
Communications International Inc. Then last year Mr. Ebbers bought MFS
Communications Inc., gaining local fiber-optic networks in numerous U.S.
and overseas cities.
And MFS held another strategically critical asset for WorldCom: UUNet
Technologies Inc., the biggest operator of local Internet-access points in the
world. UUNet has several thousand of these data systems or "access
nodes' placed in most U.S. urban markets and foreign countries. This allows
WorldCom to capture not only Internet traffic world-wide but also present
a formidable challenge to established carriers once it begins passing regular
phone calls through its Internet systems.
Without commenting on the Brooks or MCI bids, Morgan Stanley's
Stephanie Comfort said WorldCom is "picking up all the right pieces for the
long-term, especially in Internet."
But she noted that WorldCom, like all long-distance carriers, also faces
competitive pressure from an entry by the Baby Bells into the long-distance
business. WorldCom still derives 57% of its revenue from its long-distance
business.
Still, Ms. Comfort added: "The important thing in this industry is execution,
and WorldCom has a good record of delivering."
Mr. Ebbers recognized early on that the Internet is by far the biggest
long-term destabilizing threat to AT&T, the Bells and others. These carriers
must contend with demands for new capacity that are far outstripping their
abilities to supply it and they must compete with Internet companies that are
using many of the same facilities at a fraction of the established carriers'
costs.
Whoever controls access to this Internet pipe will gain the high ground in the
telecom wars. Practically all voice, data and visual communications will flow
through the Internet one day. "Any company that doesn't have a world-wide
means of giving customers such connections to this pipe will find itself
disembowled and left behind in the telecom wars," says one prominent
industry executive.
Internet Users' Advantage
Internet users don't pay near what phone users do for service even though
they use many of the same lines. The reason for this pricing dichotomy lies in
regulation. Phone companies are forced to charge certain usage rates to
phone customers for regular phone service. But data-transmission services
are priced lower to encourage technical communications and development.
For this reason a 10-page fax to Tokyo can cost $10 or more, while the
same transmission via the Internet costs only a few pennies.
The data impact from such a network is clear, when documents can be
moved for pennies on the dollar compared with regular phone lines. The
bigger damage will come when Internet-access companies, such as
WorldCom, begin using their systems to also pass phone calls for a fraction
of what phone companies charge.
Using its global Internet-access system, WorldCom could become a virtual
local phone company in the future. While they will use some of the same
lines as regular phone callers, the Internet companies' clients won't have to
support these critical phone facilities. Instead, an Internet user will simply
dial another user through the Internet, make a connection, and begin a
conversation.
In early London trading Wednesday, BT shares were 41 pence higher at
450 pence on volume of 39 million shares.
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