The Market Is a' Hoppin, and It Won't be Stoppin'
(At Least It Was at Press Time)
By Debera Bell-Beam
News of WorldCom Inc.'s $30 billion offer to buy MCI Communications Corp., coupled with confirmation that WorldCom will buy Brooks Fiber Properties Inc. for $2.9 billion, was just too much news for one day. The stuff market analysts can only dream of came true, sending telecommunications stocks and spirits soaring throughout the industry and on a global basis.
Reaction was, well, giddy. After all, the ride had just gotten better. The unexpected move raised the stakes for AT&T, also taking stock values of competitive local exchange carriers (CLECs) to near all-time highs. And that's just the beginning.
"What a day," says Richard Lukaj, vice president of investment banking, Bear, Stearns & Co. Inc., New York, who had juggled three phones since about 5 a.m. "I think we're in for some of the most exciting times that telecom has ever seen. This is a combination that creates the communications company of the future. It makes a very powerful company on both local and long distance and the data side. In many respects, it is unique. The all distance company of the future. It's here."
How WorldCom rose in the telecom ranks is a textbook example on acquisition. This newest bid might very well be the granddaddy of what has been a very acquisition-oriented past, says Stuart Conrad, director and head of telecom research, Deutsche Morgan Grenfell, New York. "They've made something like 40 acquisitions in the last five years. This is a company which today is trying to integrate the MFS Communications acquisition (through which it also got UUNET Technologies), the CompuServe acquisition, the America OnLine Network Services acquisition, the Brooks Fiber acquisition and, now, the MCI acquisition.
"On one hand you give WorldCom credit for a tremendous track record," Conrad says. "On the other hand, you've got to be somewhat cautious because this is probably the biggest bite the company has ever taken and will ever take, so all eyes will be upon it over the next several quarters as this process begins."
WorldCom fairly telegraphed its Brooks Fiber move, but MCI was at least somewhat surprising. "The Brooks Fiber acquisition was the worst kept secret in the industry," Conrad says. Not so with the MCI deal. "The rumor was floating around for the last couple of days but nothing of any credibility, so just about everybody was caught a little off guard on this one."
WorldCom's one-two punch not only has potentially knocked the breath out of AT&T, but in all likelihood it has galvanized consolidation of the telecom industry, according to some observers. All this is provided, of course, that the MCI deal goes through, and MCI shareholders have indicated they won't stop the wheels of that money machine from rolling. The long distance giant out of Jackson, Miss., made MCI an offer it is unlikely to refuse: one share of WorldCom stock valued at $41.50 for one share of MCI plus assumption of MCI's debt.
The second half of that punch, WorldCom's acquisition of Brooks Fiber, has made a hot competitive local market jump. "WorldCom absolutely set a standard for what range a fiber-based CLEC is going to be valued in terms of property, plant and equipment, and it paid such a premium over where the stock price was that all the other CLEC stocks shot up today," says Shay Houser, senior vice president, Seruus Ventures LLC, Greenville, S.C. "This is just the first of many mergers. It's going to speed up the consolidation process faster than we've ever seen it."
In a report that followed the news, Deutsche Morgan Grenfell said the Brooks Fiber deal carries huge implications for the rest of the CLEC industry. There is a scarcity of publicly traded CLECs with some waiting in the wings. "The remaining CLECs clearly will find themselves in greater demand. Investors should now take a closer look at some of the remaining players such as Teleport, Intermedia and ICG Communications."
Analysts say the long distance side also may stir from its slump. "It clearly will heat up the environment, putting pressure on AT&T and Sprint to clarify their local strategies," Conrad says. "At the same time, it will put pressure on them to act in almost a preemptive nature for any of the remaining players. If they intend to make a move on a facilities-based provider, they may have to act sooner rather than later to avoid some other player stepping up to the plate and taking another one of these guys off the table."
WorldCom's offer to MCI represents a 41 percent premium to MCI's closing stock price on Sept. 30, according to company statements--WorldCom's, that is. MCI released a brief statement in response to the breaking news several hours after it hit Wall Street: "MCI confirmed today that it had received an unsolicited offer from WorldCom Inc. MCI indicated that its board of directors would meet in due course to review all issues and options."
In a letter to MCI Chair and CEO Bert C. Roberts Jr., WorldCom President and CEO Bernard J. Ebbers listed the many benefits of a WorldCom-MCI deal, including "a premium of $9 billion to the market's current valuation of the proposed acquisition of MCI by British Telecom." Ebbers also pointed out the value WorldCom brings to MCI investors, somewhat surly over recent declines in MCI stock prices. They would retain 45 percent ownership under WorldCom as opposed to 25 percent by rival British Telecommunications PLC, according to Ebbers. "Our exchange offer can be closed promptly without the need for any consent from British Telecom," Ebbers said. "This merger could be complete without British Telecom's consent on Oct. 1, 1998, when British Telecom's class vote expires."
While MCI's new suitor burst forth as a stunning surprise for many--insiders and outsiders alike--it probably floored British Telecom, which less than two weeks earlier had issued statements reaffirming a troubled merger between BT and MCI. Negative statements fired from both sides had fanned rumors of discontent and a failing courtship, which, in turn, had driven down BT and MCI stock prices. The results were renegotiations and a reduced purchase price.
BT was keeping mum on this day, however. "I think they're blown out of the water," Houser says. "I don't think anybody predicted WorldCom would do this. This came out of left field, and it's such a huge move."
In other words, the troubled relationship that was near closing now may be facing closure. "Basically, this is a higher offer. MCI shareholders that have been interviewed today are saying they're going to vote with the better offer," Lukaj says. "There are greater synergies between WorldCom and MCI than there were between BT and MCI. WorldCom, therefore, justifies its higher valuation by virtue of the higher potential synergies between the two companies."
The move is so huge, in fact, that many are speculating how AT&T took the news and what it should do next, or first, really. Observers have said AT&T has been slow both to come up with a local strategy and to react against increased sniping from competitors that are chipping away at its long distance market share. Greater danger lurks from its offspring, the regional Bells, who are expected to take aggressive steps when they enter the long distance market. But WorldCom now has revealed it may pose an even bigger threat. "AT&T needs to now figure out what its strategy is, because WorldCom has gone on the offensive," Lukaj says. "This new combined WorldCom-MCI is still a little smaller than AT&T, but I will tell you it is a threatening size."