MCI Stock Falls 17% on Warning of Losses
MCI Communications Corp.’s warning of unexpectedly steep losses from its push to enter the local phone market led to a 17% drop in its stock price Friday and triggered speculation that British Telecommunications may seek to renegotiate terms of its $25-billion acquisition of MCI.
MCI shares plunged $7.38 to close at $35 on Nasdaq. British Telecom’s U.S.-traded shares sank $5.25 to close at $76.31 on the New York Stock Exchange, a 6.4% drop.
MCI, which has spent $1.3 billion to establish local phone service in California, New York and Illinois, said losses from its investments could exceed $800 million, hurting profit for the rest of 1997, as well as next year.
BT executives, who were present at a Wednesday MCI board meeting where the loss forecasts were disclosed, were studying the figures Friday and reportedly had not ruled out renegotiating some merger terms.
Washington-based MCI, the world’s second-largest long-distance carrier, also forecast slower revenue growth in its core long-distance business and said it is exploring steps to improve financial performance.
But analysts say that although the projected losses are a shock, they probably won’t jeopardize the deal, which was given the green light Monday by the U.S. Justice Department after a lengthy antitrust review. It still faces approval by the Federal Communications Commission.
“Actually, we would argue this announcement by MCI could accelerate the close of the deal” to take advantage of the appreciation of MCI stock value from when the deal was first announced in November, said Jack B. Grubman, an analyst for the New York investment house Salomon Bros.
MCI’s disclosure is the latest evidence that a sweeping Telecommunications Reform Act has so far failed to deliver more choices and lower prices to businesses and consumers. Instead, the law, which passed last year to open up the $100-billion local telephone market, has enriched lawyers and lobbyists as carriers trade insults and lawsuits that have delayed implementation of the ground rules for a new era of telephone competition.
“In their efforts to delay local competition, the local monopolies are obstructing the Telecom Act . . . and undermining the power of Congress,” said Timothy F. Price, president of MCI. “Regulators must move swiftly to remove the anti-competitive obstacles that are preventing local phone customers from enjoying lower prices, innovative products and better customer service.”
Jim Lewis, a regional executive for MCI in San Francisco, said Friday that foot-dragging and ineptitude by the Baby Bells have resulted in lengthy delays of new phone numbers for MCI customers.
But Roy Neel, president of the U.S. Telephone Assn., said the problem is “the long-distance giant’s inability to get a decent business plan in place and produce a product that local telephone customers would be interested in.”
Indeed, some analysts and industry officials say MCI’s disclosure could put pressure on the FCC to accelerate its review of the merger and be more open to a long-distance industry proposal to set more stringent tests for determining whether local carriers are complying with federal requirements to provide rivals access to the local telephone network.
“Maybe [FCC Chairman] Reed Hundt and the other people at the commission will care a little more about the financial health and stocks of companies other than the Baby Bells,” said Kathy Sloan, a attorney for LDDS WorldCom in Washington.
