WorldCom Inc. last week made an unsolicited offer to merge with MCI Communications Corp. in a deal that would eclipse British Telecommunications plc’s planned acquisition of MCI, which has been in the works for nearly a year.
If approved, the deal would put the WorldCom-MCI alliance in second-place in the long-distance arena behind AT&T Corp. and register as the largest ever U.S. merger.
MCI released a statement last week confirming that it had received the offer and that “its board of directors would meet in due course to review all issues and options.”
BT also released a statement saying, “We have received the material … and are considering the issues it raises.”
The exchange offer calls for WorldCom to acquire all the outstanding shares of MCI for $41.50 of WorldCom common stock per MCI share. The offer represents a 41 percent premium to MCI’s closing stock price on Sept. 30 and is valued at $30 billion, said WorldCom.
MCI’s stock was trading at around $37.75 on Nasdaq midday Friday. MCI’s stock, which had been trading in the high $20 range several weeks before the offer, jumped $5.94 to close at $35.31 Wednesday following the announcement. WorldCom’s stock was trading at around $39 midday on Friday. The company’s stock closed at $34.38 Wednesday following the announcement, down $1 from Tuesday.
BT’s American Depository Receipts, trading on the New York Stock Exchange, closed at $72 following the announcement Wednesday, up from $66.63 the day before. The company’s stock was trading at $76 at midday on Friday.
Standard & Poor’s placed WorldCom’s ratings on CreditWatch with positive implications and revised MCI’s CreditWatch implications to developing from positive. BT’s ratings remain on CreditWatch with negative implications, said the ratings firm.
Duff & Phelps Credit Rating Co. placed MCI’s debt rating on Rating Watch-Uncertain and WorldCom’s debt rating on Rating Watch-Up.
WorldCom is capitalizing on recent turbulence between BT and MCI. In July, BT came under pressure to renegotiate terms of the merger agreement after MCI reported it expected local phone service losses to double original estimates. Both companies’ stock plunged following the announcement, and several analysts said the takeover was too expensive.
In August, BT revised its original offer to MCI to about $18 billion. Although the deal already had received regulatory and shareholder approvals, the new terms required new approval from MCI shareholders, which opened the door for WorldCom to make a bid for MCI.
If MCI’s board elects not to accept the offer, MCI shareholders still could vote down the BT merger and accept the WorldCom offer without penalty, said WorldCom. With BT holding a 20 percent stake in MCI, the majority needed to approve the offer would have to come from the remaining 80 percent of shareholders.
If MCI’s board terminates the BT merger agreement and accepts the superior offer, a $450 million termination fee would be assessed.
By exiting the BT-MCI merger, which would result in a company called Concert plc, MCI could forgo an opportunity to provide international wireless roaming to its customers on BT’s network. But a WorldCom-MCI alliance could provide a bolstered resale opportunity for the company.
“MCI has a very significant resale business in the wireless business, which is very attractive and dovetails exactly with ours,” said Bernard Ebbers, president and chief executive officer of WorldCom. “We have resale cellular business also, which is growing in excess of 40 percent a year. So those two efforts will combine very nicely.”
Ebbers expressed confidence in the offer, saying he thought chances were 100 percent that it would be accepted.
Michael Elling, senior telecom analyst at Prudential Securities Inc., agreed. “I think WorldCom-MCI makes a lot more sense than WorldCom-BT,” he said. “You don’t want to destroy Concert though, which brings up an interesting notion.”
That notion is one that Ebbers apparently hasn’t failed to consider. In a letter to Bert Roberts, chairman and chief executive officer of MCI, Ebbers wrote, “We believe it is in the best interest of all parties to come to a three-way negotiated agreement providing for the merger of WorldCom and MCI. We believe that a negotiated merger transaction (as opposed to our exchange offer) could be structured to be accounted for as a pooling-of-interests, which would be even more beneficial to the stockholders of MCI, British Telecom and WorldCom than the purchase transaction proposed.”
Elling said, “I think this is a nice way for BT to get out from under their obligation to take over MCI and leaves open the opportunity for BT to merge into or work with a larger, stronger player called WorldCom-MCI. It makes a lot of sense, but in the near term, WorldCom is intent on acquiring MCI and probably will be successful.”
WorldCom’s recent history includes a handful of important acquisitions and mergers.
The company last year acquired MFS Communications, a local access provider. The deal added more than 19 local telephone switches in the United States to WorldCom’s business.
WorldCom also announced a merger last week with Brooks Fiber Properties Inc. in a pooling-of-interests transaction. Brooks, based in St. Louis, is a competitive local exchange carrier with networks operational or under construction in 44 U.S. cities.
The merger will expand the number of all fiber-optic local networks and switching facilities operated by WorldCom in the United States from 52 to 86, said the company.
