Hey John,
Here are excerpts from Paine Webber analyst's note raising the possibility.
WorldCom: Navigating the Maze
KEY POINTS
* We continue to believe that the risk/reward analysis favors an investment in
WCOM at these prices, and we maintain our buy rating. Although a close call,
it's probably better to create WCOM through FON at current prices.
* We believe that the upside to WCOM is in the mid-$50's once it becomes clear
that there are satisfactory remedies to the merger and the wireless overhang
is removed. The downside is probably 10% from current levels.
* We believe that the Department of Justice (DoJ) will let the companies know
within a few weeks if they will accept a partial divestiture of the Sprint
long distance business. We believe that WorldCom will walk away from the
merger if the DoJ requires more than this.
* We maintain a buy rating on WCOM based on
our view that it would become an acquisition
candidate if the Sprint merger falls through.
We doubt that management would be willing
to give up the equity that it would take to
acquire VoiceStream (VSTR) or NEXTEL (NXTL).
* We believe that there will be negative ripple effects on BLS and Q if the
merger is called off, but we would buy each of these stocks on weakness if
this occurs.
STRATEGIC VALUE WOULD FLESH OUT BUYERS
We reiterate that this is not the path that we think WorldCom would choose, and
we believe that the stock would rally once management makes it clear that it
will not rush into a wireless acquisition and signals that it is willing to
entertain offers. WorldCom has some of the best assets in the
telecommunications industry. It has made heavy investments in both long-haul
and metropolitan area fiber throughout the world, has the leading Internet
backbone network, has a leading position with multinational corporations and
large businesses in the United States, and is the only carrier that provides
end to end connectivity between the major population centers in the U.S.,
Europe, and Asia on its own network, giving it advantages in cost,
provisioning, and service innovation. Its current rate of revenue growth is
14%, and we believe that it can sustain a low-teens top-line growth over the
next few years. Given this rate of growth, the strategic value that it would
bring to an acquirer, and the high multiples at which the European-based
operators trade, we believe that WorldCom would command at least a mid-teens
EBITDA multiple on '01 estimates in an acquisition, or $85 to $90 per share.
FON HAS SLIGHLTLY BETTER RETURN POTENTIAL
The upside to FON if the merger goes through is $76 to $80 per share, based on
the merger exchange ratio and the value to which we believe that WCOM would
climb. The downside to FON would probably be limited to the mid-$50's because
Sprint is clearly a seller in the market's eyes and large foreign operators
would probably want to take a look, and we believe that an auction would
quickly take place. We believe that the FON group shares should be able to
command a value of $70 per share, approximately 10% less than FON shareholders
would have received in the collar of the WCOM transaction. The same buyers that
would be interested in WCOM would also be interested in FON.
EURO-US M&A ACTIVITY WOULD PICK UP QUICKLY
It is important to emphasize here that Euro-U.S. M&A activity would probably
move pretty quickly in the event that the companies walk away from the merger.
Both WorldCom and Sprint would be put in play, and we believe that the large
European operators which are trading at premium multiples to their U.S.
counterparts will probably seek to exploit this advantage quickly lest this
relative valuation slip through their fingers (as DT saw happen upon walking
away from the Qwest/U S WEST transaction). We think that WorldCom and Sprint
would be more attractive acquisition candidates than Verizon, SBC
Communications, or BellSouth because they are better positioned in the Internet
and better capable of providing the kind of complex data networking services
that the multinationals require. With everyday, information technology and data
networking becomes an increasingly important and increasingly complicated
process that businesses of all sizes must manage. WorldCom and Sprint are well
positioned to benefit from this growing demand, and this means that they hold
greater strategic value for the large European operators than do the RBOCs.
UPDATE ON WCOM-FON MERGER REVIEW PROCESS
Sprint and WorldCom have been meeting with senior DoJ officials for several
weeks trying to address their concerns, but we don't know anything definitive
about the DoJ's willingness to deal with the companies and won't know anything
for another few weeks. This is an iterative process wherein the companies offer
up remedies to the DoJ's concerns until the DoJ accepts or until the companies
are unwilling to offer anything more. In the latter case, the two sides agree
to disagree and the DoJ then tells the companies that it will sue to block the
merger. Both Sprint and WorldCom believe that they should know whether this is
likely within a few weeks because the DoJ wants to make its decision known
before the ruling on the merger from the European Commission. That agency has a
statutory deadline of July 12 for giving its conclusions on the merger.
Although the staff's recommendation to block the merger was cause for some
concern to us, the staff has taken a more adversarial stance than was
ultimately adopted by the head of the antitrust division in previous merger
reviews. We continue to believe that the merger will be approved based on a
partial divestiture of the long distance business. We believe that the DoJ will
accept a proposal in which WorldCom offers to sell the consumer long distance
customer base and the Sprint brand. The DoJ's recommendation that SBC
Communications' application to provide long distance service in Texas be
approved is helpful to WorldCom's causes.
STRUCTURING A REMEDY
As we see it, a partial divestiture of long distance in which the Sprint
consumer long distance customer base is sold to an unaffiliated party would be
a palatable solution to both sides. Consumer is where the worry is because
business customers are more sophisticated buyers and aware of the myriad of
options that are available to them. Anything more than this, like a total
divestiture of the Sprint long distance business would kill the deal in our
view because most of the synergies that WorldCom was expecting to get out of
the merger came in long distance and because there would be a huge tax bill to
be paid by WorldCom on the sale or spin-out of the Sprint long distance
business to shareholders.
How would a divestiture of the consumer long distance business work? We believe
that the Sprint consumer long distance customer base would most likely be sold
to a financial buyer. This sale would almost surely involve the sale of the
Sprint brand and a long-term, cost-based wholesale contract (either buyer would
effectively become a "switchless" reseller of WorldCom long distance service).
It would also likely to require that WorldCom keep the Sprint Consumer long
distance management team in place for the packaged sale. There is certainly a
precedent to suggest that these carriers can provide effective competition to
the big boys. EXCEL Communications grew to four million customers totally on a
"switchless" resale model. If a buyer could obtain cost-based rates, then the
gross margin opportunity would be 60%+. |
