MCI WorldCom May Bid on AirTouch, People Familiar Say (Update4)
Bloomberg News
January 7, 1999, 6:46 a.m. ET
MCI WorldCom May Bid on AirTouch, People Familiar Say (Update4)
(Updates Vodafone share price, in 16th paragraph.)
Jackson, Mississippi, Jan. 7 (Bloomberg) -- MCI WorldCom
Inc. may enter the bidding for AirTouch Communications Inc., a
move that could drive up the price for the U.S.'s largest
cellular phone company, people familiar with the companies said.
MCI WorldCom, the No. 2 U.S. long-distance company, has
contacted AirTouch to express its interest, though it hasn't
made an offer, the people said. Vodafone Group Plc, the U.K.'s
largest cellular phone company, has offered to buy AirTouch for
about $54 billion, or $90 a share, while Bell Atlantic Corp.,
the largest U.S. local phone company, has bid about $43 billion,
people familiar with their plans said.
AirTouch would give MCI WorldCom 16.1 million cellular
phone customers in the U.S and Europe, filling a hole in its
global package of telecommunications and Internet services. Any
bid from MCI WorldCom would be an about-face for Chief Executive
Bernard Ebbers, who's long said that WorldCom's primary focus is
on business customers who aren't demanding wireless services.
''Getting into wireless would take away from management's
focus,'' said Alan Hoffman, senior portfolio manager at Value
Line Asset Management, which owns 223,400 MCI WorldCom shares.
''I would like to see them concentrate'' on the fixed-line
business.
Last month, however, MCI Worldcom Chairman Bert Roberts
told Bloomberg News the company could buy a cellular phone
service provider ''in the next several years,'' as competition
drives down the value of cellular phone companies, a signal that
MCI Worldcom may be prepared to change tack.
Officials of AirTouch and MCI WorldCom declined to comment
on the status of any discussions.
A purchase of AirTouch would rank among the 10 largest
mergers and acquisitions ever. Any buyer also would assume
AirTouch's $2.8 billion in long-term debt.
A bid from MCI WorldCom would mark the second time that
Ebbers has entered a bidding war for a coveted
telecommunications company. WorldCom bought MCI Communications
Corp. in September for $47 billion, outbidding British
Telecommunications Plc and No. 3 U.S. local phone company GTE
Corp.
An AirTouch acquisition could cut into MCI WorldCom's
future earnings -- something that Ebbers has promised he'd
avoid, analysts and investors said.
Engaging Suitors
AirTouch and Vodafone officials, including Finance Director
Ken Hydon, are scheduled to meet today in their first face-to-
face meeting since Vodafone's offer Tuesday, said Alan Harper,
Vodafone's group commercial director. Vodafone Chief Executive
Chris Gent is in New Zealand and will not attend, Harper said.
Vodafone spokesman Mike Caldwell wouldn't say whether the
company would raise its bid if MCI Worldcom or another company
made a higher offer. If Vodafone deemed a higher price would
place too much of a burden on earnings, it would bow out of the
running, he said.
''Everything has its price and we have to make sure it's
good for our shareholders,'' Caldwell said.
AirTouch's shares trade at about 16 times cash flow,
compared with a ratio of 27 times cash flow for Vodafone's
shares, said Alan Lyons, an analyst at ABN Amro. Because that
makes AirTouch comparatively cheap compared to the U.K. company,
Vodafone can afford to pay a price for AirTouch that may cause
other bidders to shy away, Lyons said.
Bell Atlantic is unlikely to increase its bid because it
would slash too deeply into future earnings, analysts and
investors said. ABN Amro's Lyons named Bell South Corp. as
another company that may be interested in AirTouch.
Investors have been bidding up many telecommunications
shares. As of yesterday's close, Bell Atlantic was trading at a
price-to-earnings ratio of 30.62, while AirTouch was trading at
a P/E of 75.35.
AirTouch shares rose 2 3/8 to 78 7/8, which is 78 times its
estimated earnings. MCI WorldCom rose 3 7/16 to 78 3/8, or 94
times its earnings estimates. Bell Atlantic rose 7/8 to 55/78,
or 21 times estimates.
Vodafone's shares fell 35 pence, or 3.12 percent, to 1,055,
or 60 times estimated earnings, in London trading.
AirTouch Chief Executive Sam Ginn pinned his hopes on
wireless when he resigned as chief executive of local phone
company Pacific Telesis Group in 1994 to lead AirTouch. Wireless
has become one of the fastest-growing areas of the phone
industry.
Initial Reticence
Ebbers has shied away from the wireless business because it
takes years to earn a profit due to the high costs of building
networks and signing up customers. Several wireless companies
are now profitable or close to earning money, making the
business potentially more attractive to Ebbers, who built
WorldCom through acquisitions with the company's high-flying
stock.
What's more, rivals like Sprint Corp., the No. 3 U.S. long-
distance company, now consider digital wireless personal
communications services, or PCS, integral to their ability to
offer bundled services to customers, ABN Amro's Lyons said.
''MCI could feel a bit behind,'' Lyons said.
One analyst said WorldCom doesn't need to own wireless
networks to be successful in that market.
''I don't believe MCI WorldCom needs a facilities-based
presence in wireless to be a global telecom player,'' said Kevin
Roe, an ABN Amro analyst who has a ''buy'' rating on AirTouch.
''They'd be very late in the game and have no experience in
wireless competition.''
MCI WorldCom has been expanding quickly overseas and plans
to triple the size of its network in Europe, spending as much as
$1.2 billion to boost its total cities connected to 45 from 10.
That would complement AirTouch's European cellular
operations. AirTouch boosted international wireless customers by
88 percent in the third quarter from a year earlier, compared
with a 22 percent increase in the U.S.
On Tuesday, several AirTouch shareholders sued the company
demanding that its directors get top dollar by entertaining
competitive bids.
Unprecedented Competition
Competition is flourishing in the global cellular industry
as more companies enter the market for digital wireless personal
communications services, or PCS. Growth in customers is slowing
and the average monthly price per customer is falling in the
U.S.
In addition to AirTouch, Nextel Communications Inc. has
long been viewed as a potential wireless acquisition for
WorldCom because it also concentrates on selling to business
customers.
WorldCom made a bid to buy Nextel in 1994 and withdrew its
offer after studying the wireless network and market, which had
ample capacity, Roe said. WorldCom believed that it didn't have
to own its own network.
''They made a decision that there's too much capacity,''
Roe said.
Ebbers is known for building his company primarily through
acquisitions, making more than 50 purchases in the past decade.
In December 1996, WorldCom's $15.5 billion purchase of MFS
Communications Co. more than doubled its market capitalization,
and analysts and investors expected at least a year to pass
before it announced any more acquisitions.
Nine months later, WorldCom agreed to buy CompuServe Corp.
and America Online Inc.'s ANS Communications network services
unit for $1.3 billion. The next month, it entered the bidding
for MCI and agreed to buy local phone company Brooks Fiber
Properties Inc. for $2.9 billion.
Looking Abroad
MCI and WorldCom were each among the first phone companies
to focus on the Internet and invest in networks to carry data.
The company is now the world's leading carrier of Internet
traffic.
MCI WorldCom has outpaced its rivals, AT&T Corp. and Sprint
Corp., in revenue growth primarily because of strong increases
in sales of international and data services.
MCI WorldCom had a third-quarter profit before charges of
$430 million, or 19 cents a share, compared with a loss of $265
million, or 17 cents, a year earlier. The company stated both
quarters' results on a pro-forma basis, as if MCI and WorldCom
Inc. were combined in both periods.
Third-quarter revenue rose 30 percent to $8.61 billion, led
by a more than sixfold increase in international phone sales to
$1.23 billion. Data-services revenue rose 33 percent to $1.52
billion, while Internet services rose 72 percent to $589
million.
--Colleen McElroy (609) 279-4069, Andrew Brooks, Monique Wise
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