WorldCom restructures and creates tracking stocks

A week after competitor AT&T Corp. announced a realignment plan, WorldCom Inc. detailed its intention to reorganize in order to fine-tune its operations on Wednesday.

WorldCom will create two publicly traded tracking stocks. One will measure businesses the company considers high-growth, such as data communications, while the other will reflect the performance of units seen by WorldCom as more mature, such as consumer and long-distance services.

The tracking stock that will monitor the performance of data communications, hosting services, international business, wireless operations and business phone service will be called WorldCom, like the company. The other tracking stock will be called MCI and will cover services aimed at mass markets and small businesses, as well as dial-up Internet access, paging and prepaid card services.

WorldCom CEO Bernie Ebbers said during a teleconference that tracking stocks offered the quickest changeover without any federal regulatory rules and provided the company flexibility for debt allocation. The company has suffered from a perception that it doesn’t know where exactly it is heading, and this will allow management to put specific focus on the two business units, Ebbers said. Also, it will help investors to understand the value of each business, according to WorldCom.

The plan calls for WorldCom shareholders to receive one share of MCI stock for every 25 shares of WorldCom common stock held immediately prior to the tracking-stock distribution date, expected to happen during the first half of 2001.

WorldCom also lowered its forecast for its fourth-quarter financial results. It said that revenue growth for WorldCom as a whole in the fourth quarter is expected to be in the seven per cent to nine per cent range, compared with last year’s fourth quarter. The company expects fourth-quarter revenue growth of approximately 12 per cent to 14 per cent for the WorldCom businesses and essentially a flat growth rate for MCI businesses.

WorldCom expects earnings per share for the quarter to come in at between 34 cents and 37 cents per share, with WorldCom between 27 cents and 30 cents a share and MCI in the area of seven cents on a pro forma basis. It expects full-year 2001 earnings to be between US$1.55 and $1.65 per share with WorldCom earnings between $1.25 and $1.35 per share and MCI between 25 cents and 30 cents a share on a pro forma basis.

According to First Call/Thomson Financial in Boston, 18 analysts had expected earnings of 49 cents a share for WorldCom for the fourth quarter. Investors responded unfavorably to the WorldCom’s news on Wednesday as the Clinton, Miss.-based company saw its shares shed 20 per cent of their value or $4.81, closing at $18.93. Trading volume exceeded 195 million shares.

WorldCom attributed the downward projections to competitive pressures in the telecommunications industry, increased spending to support the company’s growth and economic factors.

The failed merger attempt with Sprint Corp. earlier this year also may have taken away some of the company’s focus on moving forward, but it was the right move for the company, Ebbers said. He acknowledged he was partly to blame for some of the company’s recent woes, but said he hopes the company can right the ship and get back to its glory days.

“This is certainly not a enjoyable experience,” Ebbers said “I will never say there haven’t been mistakes made. I will admit that some of them were mine. I think that any human being would say that it is more fun when things are going well than when we struggle. But I believe from deep parts of me that we can get back to where we were.”

The reorganization and the outlook for the company was not a surprise for one analyst.

“It has been the interexchange company in the greatest difficulty,” said Tom Nolle, president of CIMI Corp. in Voorhees, N.J. “It’s the only IXC (interexchange company) with no wireless business. It has been clear for about a year that long-distance pricing was going to collapse and that data and Internet were not going to make up for that.”

Profits from investment in the data and Internet business units have not come along for WorldCom, Nolle said. The theory was that data and Internet revenues were going to explode, but that has not occurred for the sector, he said.

The economy for free bandwidth is collapsing, suggests Nolle, and telecommunications companies, like WorldCom, are now under pressure to find out what users are willing to pay for bandwidth.

“The market is losing ground,” Nolle said. “The overall revenue (stream) is losing ground. Spending is lower. We have really lived in a false paradise. This is going to get worse for these players before it gets better.”

About 60 percent of WorldCom’s revenues come from traditional voice service, Nolle said. Residential service has made little gains, while business service is flat and data revenues have not increased as much as expected.

Nolle suggests that WorldCom’s announcement of tracking stocks may be an effort to attract Bell South Corp. as a partner. The tracking stocks can help increase shareholder value, while not having to increase overall performance. This could make WorldCom appear a more attractive partner for Bell South. The road ahead could be difficult for WorldCom if it does not get to Bell South before competitors AT&T or Sprint Corp., Nolle suggests.

Ebbers said he did not see WorldCom pursuing a wireless business partner during the “next period of time.” He did not quantify that time period.

On the face of it, WorldCom is doing what AT&T did in its recent reorganization by trying to isolate the company’s consumer business, which is saddled with the declining long-distance segment, said Jeff Moore, senior analyst for network services with Current Analysis Inc. in Sterling, Va. But WorldCom may fare better as it is going back to the company’s roots, with MCI as the consumer business and WorldCom as the Internet and data company. MCI already has a strong consumer brand that may assist the company, he said.

But Moore agrees that WorldCom should move away from bandwidth access and move more toward opportunities to facilitate e-commerce, an area that has more revenue potential. Moore does not see BellSouth as potential partner, but he said he does see acquisitions of e-commerce-oriented companies potentially in the company’s future.

Merrill Lynch & Co. Inc. also soured on WorldCom’s news, downgrading its rating to neutral from accumulate. The financial firm expects it will take some time for WorldCom to turn itself around and it will take time for the new stocks to ramp up. Merrill Lynch suggests that consumer long distance and that the regional Bell Operating companies (RBOCs) are starting and will continue to eat into WorldCom, AT&T and Sprint’s long distance market share. Ebbers acknowledged that he anticipates that the RBOCs will be leaders in the consumer side of the business in the future.

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