Gyrations on Wall Street Inject More Risk Into WorldCom Bid
On Oct. 1, when WorldCom Inc. made its surprise, initial $30-billion bid for MCI Communications Corp., WorldCom Chief Executive Bernard J. Ebbers said the beauty of the deal was that no borrowing was involved--”not a red dime.”
The new bid that WorldCom unveiled Monday, however, was a very different creature.
In order to win over the boards of MCI and its former betrothed, British Telecom, WorldCom not only raised its bid by 23%, to $37 billion (excluding the debt it would assume), but also agreed to pay BT $6.9 billion in cash for its 18% MCI stake.
Clearly, WorldCom wanted to decisively top a $40-per-share all-cash offer for MCI from GTE Corp., but investors seemed to think Ebbers went too far in upping his offer to $51 a share: WorldCom stock dropped $2.13 to $31 Monday in trading on the Nasdaq Stock Market.
While WorldCom still is thought to have a good chance of completing the biggest corporate merger in U.S. history, the risks have grown dramatically in the six weeks since its opening bid.
WorldCom stalked into the takeover battle armed with one of the best-performing stocks on Wall Street. Since then, of course, the investment climate has changed considerably.
The stock market has been battered by the currency crisis in Asia, and WorldCom’s stock has been shaken along with it. Monday’s closing price of $31 is down 19% from a recent closing high of $38.06 Oct. 3.
Even if GTE decides not to pressure WorldCom with yet a higher bid, WorldCom faces no easy task in holding the deal together during the six to nine months it will take to complete any transaction.
“They’ve got to be sweating it a little bit,” Boyd Peterson, a telecommunications analyst with Yankee Group, said of WorldCom. “They don’t have control over this volatile market.”
David Graham of Palley-Needleman Asset Management in Newport Beach, which has a large MCI stake, acknowledged that the merged company will be “a riskier enterprise” than the current MCI.
On the other hand, Graham said, if it weren’t for the takeover activity, MCI “would probably be trading in the mid-$20s” instead of $41.50, where it closed Monday.
A New York arbitrager whose firm has made a “substantial” wager on WorldCom’s ability to pull off the deal said that the firm’s investment bankers, Salomon Bros., will earn their fees in the months to come.
It is Salomon’s job to help WorldCom keep its stock buoyant so that MCI shareholders will be happy with the $30 billion in new stock they will be receiving and thus will approve the takeover.
“They [Salomon] have got to talk up the stock, continue to maintain the mythology of Ebbers,” said the arbitrager, who asked not to be identified.
Neither can WorldCom’s existing holders be ignored, as their shares stand to be diluted by the new stock the company must issue to complete the deal.
Under the agreement announced Monday, if WorldCom’s own shareholders fail to approve the deal, WorldCom must pay MCI a penalty fee of $1.64 billion, a WorldCom spokesman said.
The arbitrager said he does not see any special problem in WorldCom’s having to borrow the $6.9 billion it will take to pay off BT.
“The banks and everybody else in the world think [Ebbers] walks on water,” he said.
In fact, WorldCom already has a leg up in raising the cash. It plans to draw $3 billion of the money from a $5-billion credit line that it established last summer with its lead banker, NationsBank of Charlotte, according to Jim Davis, president of Loan Pricing Corp., which follows the commercial lending business.
The remaining $3.9 billion in cash will come from a new credit facility, also through NationsBank, Davis said. NationsBank will then “syndicate” the loan, offering portions to banks and other institutional investors.
“There is definitely not a problem in getting this deal done,” Davis said. “There is a strong market for bank loans, and WorldCom is a name that investors really like.”
