Investors and analysts agree WorldCom Inc.'s attempted takeover of MCI Communications Corp. is the investment equivalent of a custom-made Calvin Klein original - a perfect fit.
Some, however, question how the $30 billion deal would be executed.
Jackson, Miss.-based WorldCom's takeover attempt comes as British Telecommunications P.L.C.
had been close to closing its $21 billion acquisition of MCI, Washington. WorldCom agreed to pay approximately $41.50 a share for MCI. BT, under pressure from shareholders, had earlier reduced its takeover bid by 25% and was to pay $30 a share for acquisition of MCI. BT currently holds a 20% stake in MCI.
"I think it's a fabulous fit, especially when you look at the assets that WorldCom has combined so far," explained Brian Hayward, portfolio manager for INVESCO Funds Group Inc., Denver. Recent acquisitions by WorldCom included MFS Communications, which owned Internet provider UUNET, and CompuServe and America Online's data networks. "There's no question that this is a better fit than the British Telecom bid was going to be, especially considering that British Tel had nothing in the United States. No one else has such a combination of assets as WorldCom."
INVESCO held about 65,000 shares of MCI, 600,000 shares of WorldCom, and approximately 1 million shares of British Telecom, according to the 1997 second quarter CDA/Spectrum 13(f)Institutional Stock Holdings.
Good for all 3 companies
INVESCO has seen its WorldCom shares rise about 46% since the beginning of the year.
Said Paul Wright, vice-president of Loomis, Sayles & Co., Boston: "Believe it or not, I think this deal is good for all three companies.
"MCI gets a higher share price than they would have had from BT, and assuming they (MCI shareholders) keep their WorldCom shares, they have better growth looking out over the next few years from this merger.
"BT shareholders benefit as they held 20% of MCI's shares, so they get a boost from the takeover premium and their BT shares aren't diluted as they would have been," Mr. Wright said.
"As for WorldCom, I see a lot of synergies here and would expect a bump in earnings by 1999, although it will be a bit tougher to keep earnings higher beyond that, after they incorporate MCI. It'll be a bigger company and they will be dealing with the residential business, so it will be a challenge to keep their earnings growing."
He added: "I think WorldCom is probably discounting the positive benefits of this, so this should have a moderately positive spin for them. It should allow them to outperform the market by about 10% per year for the next few years."
Loomis, Sayles owned 40,000 shares of MCI and about 100,000 shares of WorldCom as of June 30, according to Spectrum.
Merging MCI and WorldCom is also seen as a good fit from the perspective of another large shareholder, Bank of America, San Francisco.
"Acquiring MCI is the capstone to a series of very positive deals by WorldCom," explained Rafael Villagran, vice president and senior portfolio manager at Bank of America, San Francisco. "As a major shareholder in both MCI and WorldCom we feel that this merger forms a strategically better-positioned company and therefore something we would endorse as shareholders." According to Spectrum, Bank of America held 1.1 million WorldCom shares and about 900,000 MCI shares as of June 30, although Mr. Villagran said the firm had added to its MCI holdings since.
Although he declined to discuss a specific target price, Mr. Villagran added "we had a target price that appeared fairly extreme when we first started our ownership of WorldCom, and we're progressing very nicely towards that. We have a healthy position and don't feel the need to buy more at this time."
'Nice turn of events'
Larry O'Connell, vice president and senior analyst with American Express Asset Management, Minneapolis, called the deal "a nice turn of events."
"This deal seems to make a little bit more sense than the earlier agreement with British Telecom. The reason BT was interested in MCI was because of the concert consortia (combining of telecom services) of a global network. This enhanced offer by WorldCom would seem to eliminate BT's interest in MCI, in terms of overbidding, though I hope that they would maintain their ownership position and reach an agreement so that this concert theme can continue to play," Mr. O'Connell said.
He said his firm is a sizable investor in all three companies, although its current position in MCI is a "significant reduction from earlier this year." According to Spectrum, American Express owned 1.4 million shares of BT, about 6 million shares of MCI and approximately 7.8 million shares of WorldCom as of June 30.
Soon after the proposed merger announcement, Mr. O'Connell was "urging people to add to their holdings of both MCI and BT . . ."
"I would play MCI a little more because of the arbitrage spread. For people who didn't get burned by the earlier BT deal, there might be an opportunity here to sit with MCI in hopes that the deal will go through."
He added his company would be willing to "hold MCI through the conversion, and take the WorldCom stock."
When asked whether the Federal Communications Commission would approve the deal, Mr.
O'Connell said: "I would be on the side of those who say it's going to happen."
Said William Vogel, principal with NationsBanc Montgomery Securities Inc., Charlotte, N.C.: "I see no issue. MCI has 7% of the Internet market, WorldCom has 10%. How is the Department of Justice going to construe that as giving them a 17% foothold to set prices? It's ridiculous. Next issue."
INVESCO's Mr. Hayward pointed out the biggest challenge is for WorldCom to successfully assimilate MCI, a company more than twice its size.
"But if there is someone in this industry who could pull this off, my bet would be on their management," he said.
Both Messrs. O'Connell and Wright agree, that pending completion of the merger, MCI probably will look at shedding its residential customer service.
"That to me would make sense..*.*. There would likely be several potential buyers, you might say 'wannabes,' who could move up the scale in terms of total revenue from long distance. Therefore, MCI could likely not only sell its residential services, but sell at a premium or a profit," Mr. O'Connell said.
Richard Rubinstein, senior vice president of Oppenheimer & Co. L.P., New York, confirmed Oppenheimer is a "major holder" of WorldCom shares.
In the second quarter Spectrum survey, Oppenheimer held more than 9 million shares of WorldCom.
"Even before this deal (between WorldCom and MCI) was struck, many of the growth portfolios have had and continue to have a position in WorldCom," he said. Mr. Rubinstein added the firm sold some MCI shares following announcement of the MCI/BT deal.
BT holders may welcome deal
He noted BT shareholders probably welcome an end to the original proposed merger with MCI.
"There were lots of questions to BT management why they paid that price and about how diluting it would be to the company," he said. "I think it was a combination of WorldCom and investment bankers that helped to put MCI in play for a second time, but BT shareholders will likely not be unhappy."
For WorldCom, Mr. Rubinstein said, "the merger is different."
"They have a local loop and had already moved into new technology markets with their purchase of UUNET (an Internet service), as had MCI. There is great synergy at play with these two companies."
But according to Mr. Rubinstein, the "real clincher" for the WorldCom offer can be found not just in the amount offered, but also in the method of payment.
"WorldCom is basically going to make the acquisition for stock, and their stock sells at a very high multiple," he said. "The cost of capital is a lot less. Also, the dilutive effects of taking a profitable company and putting it onto a high multiple company still doing a lot of investment spending made the economics of the deal look a lot better.
"If WorldCom's business model sorts out pretty well, they stand to make more money than the incumbent companies as they're coming from a cheaper cost base."
As for MCI, Mr. Rubinstein said, "They've come down the path too far to remain an independent company." He believes MCI executives would "probably be more excited about a WorldCom deal but (would) have more influence and independence in a merger with BT."
He also predicted BT "would not gracefully bow out" of its deal with MCI, and likely would "pump WorldCom for more money" before it agreed to walk away.
MCI gets piece of a stallion
As to which deal is better for MCI, NationsBanc's Mr. Vogel said, "My pithy remark to you is, Why would you want to keep owning a pig when you can own a stallion?"
"Most people might think that if a company with $7 billion in revenue this year tried to buy a company with $22 billion in revenue for $30 billion there's no way the numbers can work. Is it realistic to think that BT would accelerate its growth rate to 30% anytime soon? I don't think so.
Com, however, is well-positioned worldwide to ride the wave of the data tsunami that is gathering today. It's good that they start off with low market share and relatively small revenue base - that leaves them room to grow.
"So, what do WorldCom and MCI shareholders have to look forward to if they combine? A very powerful vehicle for adding value by extracting savings from the MCI franchise that previously wouldn't have been possible to extract with the BT linkup."
Mr. Vogel maintained his unwavering optimism about WorldCom stock.
"My 12-month price target for this stock is 60, based on $2 for earnings for 1999 and a 30% growth rate," he said.
As of June 30, Spectrum shows NationsBanc held more than 9 million shares of MCI, 1.2 million shares of WorldCom and less than 10,000 shares of BT.