Investors await WorldCom decision
If the telecom's bankruptcy reorganization plan is approved, a tough business will get tougher.
September 8, 2003: 12:01 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer
NEW YORK (CNN/Money) - The day of reckoning for WorldCom is finally drawing near.
A hearing to decide whether or not WorldCom can emerge from bankruptcy protection began Monday in a U.S. bankruptcy court in New York. The hearing is expected to last at least two weeks, according to analysts. WorldCom filed for bankruptcy in July 2002, following the disclosure of the biggest instance of accounting fraud in history.
The hearing had originally been scheduled for last month but was postponed after competitors AT&T (T: Research, Estimates), Verizon Communications (VZ: Research, Estimates) and SBC Communications (SBC: Research, Estimates) alleged that WorldCom illegally routed calls in order to avoid paying them access fees.
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But despite these accusations and other legal woes, including securities fraud charges filed against the company and former executives by Oklahoma's attorney general last month, telecom analysts said the court will probably approve WorldCom's reorganization plan.
"Given the government's preference to have multiple telecom service providers, I would expect WorldCom to emerge from bankruptcy," said Drake Johnstone, an analyst with Davenport & Co.
Nearly all of WorldCom's creditors have already approved the plan. If WorldCom exits bankruptcy, the company will issue new shares and bonds to creditors and intends to be known as MCI. Most WorldCom bondholders will also receive approximately 36 cents on the dollar for their bonds while WorldCom shareholders will receive nothing.
However, WorldCom's potential emergence from Chapter 11 would probably have more of an impact on shareholders in other telecom carriers.
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There is growing concern that WorldCom could be a formidable competitive threat if it is allowed to exit bankruptcy protection, mainly because the company would have a relatively small debt load of about $3.5 billion to $4.5 billion, compared with about $40 billion at the time of the bankruptcy filing.
"WorldCom emerging from bankruptcy with a slimmed-down balance sheet would be problematic for the wireline industry," said Todd Rosenbluth, an equity analyst with Standard & Poor's.
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Rosenbluth said the company is likely to use aggressive pricing to try and lure back customers it lost. That could hurt Verizon, SBC, BellSouth (BLS: Research, Estimates), AT&T and Sprint (FON: Research, Estimates), with SBC and Sprint likely suffering the most.
That's because SBC is still not approved to offer long-distance service in five key markets, including Illinois and Michigan, while Sprint is just slowly beginning to offer local service in addition to long-distance. So WorldCom, which offers local and long-distance service, would have more to offer than these two, Rosenbluth said.
But Johnstone said a leaner WorldCom would not change the environment that leaves the industry plagued by price wars.
"WorldCom is out there competing now and being aggressive, and the Baby Bells are as well, especially in the small and medium business market," said Johnstone, who has a "neutral" rating on Verizon and "sell" ratings on AT&T, BellSouth and SBC.
Johnstone also said it won't be clear sailing for WorldCom in a post-bankruptcy situation since it would then have to pay interest on its debt, something it did not have to do while it was under bankruptcy protection.
To that end, Scott Cleland, CEO of Precursor Group, an independent telecom research firm, predicts that not only will WorldCom's bankruptcy plan be approved but that the company is likely to be acquired by one of its competitors at some point.
"[WorldCom CEO Michael] Capellas will eventually sell the company," Cleland said. "Telecom is in such a bad state that it would not be in the best interests of shareholders for it to remain independent."
So the competition might get its wish after all, to see some capacity taken out of the industry. Nonetheless, that's small consolation for telecom investors. Shares of Verizon, SBC and AT&T are down year-to-date, while shares of BellSouth are up only 2 percent and Sprint is up just 6 percent. |
