MCI to Sell All Internet Units to Appease Regulators
London, June 15 (Bloomberg) -- MCI Communications Corp.,
the No. 2 U.S. long-distance phone company, offered to sell all
its Internet assets to win regulatory approval for its $40.2
billion acquisition by WorldCom Inc., said an EU official close
to the negotiations.
Cable & Wireless Plc, the U.K.'s No. 2 telephone company,
insisted today it still had an agreement to buy some of MCI's
Internet assets. It also said MCI agreed to negotiate with it
first before it sells the rest, even though a U.S. court ruled
Friday MCI can look for other buyers.
Negotiations between MCI, WorldCom -- the No. 4 U.S. long-
distance phone company -- and regulators in Europe and the U.S.
threatened to undermine the agreement between Cable & Wireless
and MCI, which analysts agree would considerably boost the U.K.
company's U.S. and international presence. Earlier this month,
MCI agreed to sell its wholesale Internet business for $625
million to Cable & Wireless. MCI's corporate accounts and retail
Internet businesses were not included in the agreement.
''The issue is whether MCI's entire Internet business goes
up for auction or whether it goes at a price that suits Cable &
Wireless,'' said Keith Mallinson, managing director of The
Yankee Group Europe, a telecommunications consultancy.
He said U.S. telecommunications mergers and takeovers since
the latest round of deregulation in 1996, including WorldCom's
bid for MCI, make economic sense because they eliminate
duplicated costs.
C&W Confident
However, Cable & Wireless remains confident its agreement
with MCI will proceed as planned.
''We're pleased that as part of the proceedings, all
parties agreed our contract is still in force,'' said Peter
Eustace, a spokesman for Cable & Wireless.
He declined to say whether Cable & Wireless will bid for
the enlarged MCI Internet business or what it will do if it
loses the wholesale business. ''Those are all bridges we'll
cross when we come to them,'' he said.
Cable & Wireless's shares fell as much as 4 percent to
643.5 pence. On Friday, MCI's closed up 1 3/16 at 49 13/16 and
WorldCom's shares closed up 1/4 at 42 1/2.
Last week Cable & Wireless sought an injunction in a U.S.
court to require MCI to comply with its agreement to sell its
wholesale Internet business to the U.K. company. The court
refused to grant the injunction.
Potential bidders for MCI's Internet businesses include IXC
Communications Inc., AT&T Corp., Sprint Corp., GTE Corp. and
PSINet Inc., analysts said. IXC officials refused to comment,
and the other companies didn't return calls seeking comment.
WorldCom officials weren't available to comment. British
Telecommunications Plc declined to comment on whether it is
interested in buying any of MCI's Internet businesses.
It's likely that one buyer would get all of MCI's Internet
assets, leaving Cable & Wireless empty-handed -- except for a
$25 million payment from MCI for breaking the earlier sales
agreement -- unless it wins the bidding, industry analysts and
antitrust attorneys said.
''The economic justification for buying the enlarged
Internet business is quite possibly weaker for an organization
that doesn't already have a stronger North American presence.''
Setback
Others said all is not lost for Cable & Wireless.
''This is a setback for Cable & Wireless rather than a
grave disappointment,'' said Jim Sloane, a telecommunications
analyst at Deloitte & Touche Consulting. ''But they're obviously
worried -- the injunction was quite a severe reaction. It won't
have done relations with MCI any good.''
European Union regulators view MCI's new proposal as a
positive step toward securing EU approval for the acquisition,
said an official close to the negotiations, who spoke on
condition of anonymity. He said MCI still needs to deliver a
formal proposal clarifying some aspects of the offer in order to
convince EU regulators it's divesting its entire Internet
network.
One stumbling block, he said, is finding a way to transfer
MCI's Internet services customer accounts to the buyer without
interfering with MCI's agreements to provide other
telecommunications services to retail customers.
MCI's Internet services business is integrated with MCI's
other telecommunications services, making it difficult to
separate the two customer bases, the official said.
He wouldn't say whether MCI's offer included naming a buyer
for the assets. He said, though, that the buyer would have to
meet EU criteria. It would have to be a viable competitor to MCI
and to guarantee that it would put the assets to good use in the
market and that it would be prepared to invest in further
developing the assets.
The agreement will have to include a guarantee from MCI
that it won't try to lure its old customers back for a certain
period of time following the sale, the official said.
The official said he expects MCI to deliver the necessary
details in coming days, allowing regulators to decide whether to
approve or block the WorldCom acquisition before Friday's
meeting of an advisory committee of competition officials from
the 15 EU nations. The European Commission is working on
WorldCom's proposed acquisition of MCI in tandem with the U.S.
Department of Justice and the Federal Communications Commission.
Scarce Property
If Cable & Wireless loses the opportunity it seized to buy
MCI's wholesale Internet business, it will find it difficult to
replicate it, analysts said.
''It was very serendipitous that this opportunity appeared
and Cable & Wireless was able to get it,'' said Mallinson.
''It's a pretty scarce property -- there are not that many
international Internet assets around -- most have fallen into
UUnet's clutches.'' UUnet is WorldCom's Internet unit that
carries traffic for businesses and other Internet providers.
The EU official said MCI's offer to sell its other Internet
business is a positive move in ensuring that overlap between
WorldCom's and MCI's Internet backbone businesses is eliminated.
Regulators are worried that a combined WorldCom-MCI would
control more than half of the world's Internet traffic.
''They've told us they will go out for a rebid on assets
that include those involved in this transaction,'' Charles
Lettow, Cable and Wireless's lawyer, said at Friday's hearing.
Lawyers for Cable & Wireless asked for a temporary order
enforcing the May 28 agreement between the companies.
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