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. Return to top of page Copyright ? 1997 Dow Jones & Company, Inc. All Rights Reserved.