Will WorldCom Disconnect MCI?

A sale would bring much-needed cash. But buyers may be scarce

After just a month on the job, WorldCom (WCOM ) CEO John W. Sidgmore is moving fast to fix the troubled telecommunications giant. At the end of June, he is expected to announce a major restructuring of the nation's No. 2 long-distance carrier. He plans to sell off WorldCom's $1 billion wireless-resale business and slash capital spending by another $1 billion; from $8 billion in 2001, it will now drop to $3.5 billion. Up to 16,000 employees--or 20% of the Jackson (Miss.) company's workforce--will be let go. Plus, he is close to clinching a new $5 billion line of bank credit, which would keep WorldCom out of a liquidity crisis for the next 18 months.

But Sidgmore might have an even bigger play in the works. He hopes to sell WorldCom's perpetually struggling MCI long-distance business, dismantling a chunk of the telecom empire that deposed CEO and founder Bernard J. Ebbers built over the past 30 years, says a WorldCom insider and one telecom exec who was approached about buying the outfit. "It's not a matter of if WorldCom will sell MCI, but of when and for how much," says Farooq Hussain, a partner at Washington (D.C.) consultant Network Conceptions LLC.

Certainly, an MCI sale would ease WorldCom's woes. It could raise several billion dollars in cash and dump a declining business that has helped push WorldCom's stock below $2 a share. But given MCI's debt and withered prospects--not to mention the onerous sale conditions that Sidgmore is imposing--a deal is far from certain. Says Friedman, Billings, Ramsey Group Inc. analyst Susan Kalla: "MCI does have great value, but the timing couldn't be worse."

Indeed, finding a buyer won't be easy. Currently, Morgan Stanley Dean Witter & Co. is trying to hook a deal. Independent carrier IDT Corp. and Baby Bell SBC Communications Inc. have both taken a look at MCI, sources say. For now, WorldCom CFO Scott Sullivan denies that MCI is being sold, but one company insider says that's only because no one has made an offer. Sidgmore won't comment on the possible sale.

Why the push for a deal? For starters, dumping MCI would help WorldCom pay down some of the $30 billion it owes and would strip MCI's $6 billion in debt from its books. Plus, it would shed MCI's slumping long-distance business, where revenues fell 15% last year and could sink another 20%, to $11 billion, this year. That would allow the company to focus on growth areas such as Web hosting, virtual-private networks, and Internet access.

Despite its difficulties, though, MCI has some allure. Analysts say Baby Bells SBC, Verizon, and BellSouth would benefit from MCI's market share and brand name. By carrying MCI's traffic on their networks, they could trim its workforce up to 40%. "The Bells could change the whole cost model of MCI, making it immediately profitable," Kalla says.

MCI's network could also boost the Bells. It is seen as among the most advanced in the world, capable of providing digital services such as Web hosting and virtual-private networks, which are most in demand by big companies. The Bells are weak in those areas.

There's a catch: Sidgmore only wants to sell access to MCI's customers. He hopes to hang on to MCI's network in order to use it to sell Web and networking services to corporate buyers. He also plans to lease some of the network's long-distance capacity to the firm that acquires MCI's customers, thereby allowing WorldCom to keep the $1.5 billion in quarterly revenue that it gets from consumer long-distance.

But that's not a deal the Bells are interested in. Nor do they relish the prospect of taking over MCI's problems. Some telecom execs think that MCI will sell even cheaper if they wait and struggling WorldCom slips toward bankruptcy. Says Jefferies & Co. analyst Richard Klugman: "The Bells feel no sense of urgency in buying MCI." While most figure that Sidgmore will eventually find a buyer, chances are he won't get the price--or the conditions--that he's asking for.

By Charles Haddad in Atlanta, with Peter Elstrom in New York

— With assistance by Peter Elstrom

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