thestreet.com on WCOM sale of MCI Internet business
(Isn't this event very bullish for ASND? Check out the bolded sections. Won't UUNet just increase their spending on next generation equipment and not really miss the older MCI equipment? And, isn't UUnet an ASND/Cascade shop?]
thestreet.com
Selling the Crown Jewels?
By George Mannes
Staff Reporter
7/22/98 12:18 PM ET
Back in November, when WorldCom (WCOM:Nasdaq)
reached a deal to buy MCI (MCIC:Nasdaq), the
companies cited the combined Internet business and
overall cost synergies as two of the reasons why the
merger made sense.
But now that MCI, pressured by regulators, is selling off
its Internet business, some analysts wonder how much
this condition for getting the deal done will hurt
MCI/WorldCom's postmerger operations.
"This sours the deal to a certain extent," says Michael
Smith, U.S. research director for Probe Research, which
follows the telecom industry. "They're forced to give up a
key component of MCI."
As part of a deal announced last week, MCI is selling to
United Kingdom-based Cable & Wireless (CWP:NYSE
ADR) various Internet operations, including 3,300 major
dedicated corporate customers for Internet access and a
dial-up business totaling 250,000 residential and 60,000
business customers.
That's on top of the divestitures MCI announced in May in
hopes of assuaging regulators' monopoly concerns. Back
then, MCI agreed to sell C&W its nationwide U.S. Internet
backbone, which permits dial-up access from more than
300 points across the U.S., and its 1,300 customers who
are themselves Internet service providers. MCI is getting
$1.75 billion in cash in the revised transaction, which is
conditioned on the completion of the WorldCom deal.
MCI/WorldCom won't be locked out of the Internet
business altogether, because it will still hold onto
WorldCom's UUNet subsidiary. Total Internet revenues for
WorldCom amounted to $566 million last year, more than
double the year-earlier figure of $253 million.
But the business that MCI is selling is growing fast, too.
Staffed with 1,000 employees, it reports $244 million
revenues in 1997, and C&W estimates it will have $650
million in sales in the year ending March 31, 2000. Total
1998 revenues for the combined WorldCom/MCI operation
will amount to $32 billion, the companies estimated last
year.
MCI and WorldCom have trumpeted the savings from
combining their various businesses, estimating $2.5 billion
in saved operating costs in 1999, increasing to $5.6 billion
by 2002. But they have not specified Internet-related
savings, according to analysts and an MCI spokesman.
Some analysts wonder how much WorldCom/MCI will
suffer from the sale. William Newbury, telecom analyst for
WorldCom shareholder College Retirement Equities
Fund, part of the giant teachers' pension fund
TIAA-CREF, says, "It's curious because WorldCom/MCI
didn't want to sell this business. They resisted [regulators]
all along. ... I don't have all the answers as to why this
business, now that it's sold, is not going to have an
impact."
One of the goals of the MCI/WorldCom merger, as with
virtually all other recent telecom mergers, is to cement
customer loyalty by offering an array of services including
local calling, long distance and Internet access. But the
sale complicates that, says Anna-Marie Kovacs, telecom
analyst for Janney Montgomery Scott. "It probably hurts
[MCI] somewhat to have to go to their customer base and
say, 'We can do your long distance for you, but we can't
do Internet,'" she says. Moreover, once Cable & Wireless
has its hands on MCI's Internet customers, it might try to
steal away their long distance business, too, says
Kovacs, who dropped her rating on MCI to sell from hold in
mid-June. But MCI will be able to fight back, she says,
thanks to the minimal competitive restrictions put on MCI
as part of the deal. "It's probably as limited a noncompete
as they could hope for," she says.
Other analysts dismiss the impact of the divestiture.
"I don't think it's going to handicap them at all," says
Jeffrey Kagan of Kagan Telecom Associates. Although
there is always an impact on a company when it has to
sell assets, Kagan says the combined organization will be
able to rebuild what it has lost rather quickly, thanks to
the lessons MCI has learned over the past five years, and
the breakneck growth of the Internet market. "It's growing
at several hundred percent per year as opposed to 10%,"
he says, meaning the pool of potential new customers
could soon outweigh the base of existing customers that
will be hands-off to Worldcom/MCI under the noncompete.
Kagan compares the situation to a person who is putting
away $500 a month in an investment plan, but loses the
first two years' investment. Ten years later, he says,
"You'd still have a great investment plan; you'd have just
lost a few years."
Daniel Zito, senior analyst with Legg Mason Wood
Walker, sees another positive to the sale. If it hadn't
taken place, WorldCom and MCI would have had to spend
time rationalizing their product lines, sales forces and
marketing channels. Now, the companies can simply sell
UUNet's products through MCI's sales force. "There's no
decisions to be made," says Zito, who has an outperform
ranking on MCI, for which Legg Mason has done no
underwriting. The sale "hurts, but it certainly is not a
death blow by any stretch of the imagination," he says.
And despite Smith of Probe Research's contention that
MCI and WorldCom will be hurt by the deal, he thinks the
choice of buyer was a masterful stroke: Cable & Wireless
is one of the weakest competitors in the corporate
market. "This is not AT&T (T:NYSE). This is not Sprint
(FON:NYSE). This is not even Qwest (QWST:Nasdaq),"
he asserts. "They couldn't have picked a more ideal
candidate to buy the business."
Adding up all the positives, even TIAA-CREF's Newbury
remains supportive: "I like all the aspects of the merger
and the company's position overall. I'm glad to get the
deal done."
For more info on institutional holders of these stocks, as
well as financial statements and earnings estimates,
please see the Thomson Company Reports.
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