Asset Sale Unlikely to Make Difference

By ELIZABETH DOUGLASS

July 23, 2002 12 AM PT

TIMES STAFF WRITER

WorldCom Inc. plans to sell off nonessential assets to raise cash, but analysts cautioned Monday that there won’t be many takers and the prices will be too low to make a dent in the telecommunications firm’s massive $41-billion debt.

The company, which filed the nation’s largest bankruptcy case Sunday, already had been shopping some of its overseas holdings, including its assets in Japan and its ownership stakes in phone companies in Brazil and Mexico. WorldCom also has said it will sell its wireless services unit.

But most of those assets aren’t worth much, and selling additional businesses such as its SkyTel paging unit and its local phone service operations won’t bring in much cash either, experts say.

Some observers believe WorldCom may be forced to part with valuable operations, including its UUNet Internet unit, to appease its bankers and creditors.

Last week WorldCom told creditors it would not sell any operations for at least 70 days.

“If WorldCom’s management had their way, it would be a mix of ... retaining the UUNet business and the business data services under WorldCom, and everything else would be sold off,” said David Willis, a research analyst at Stamford, Conn.-based Meta Group. “It’s not clear that the creditors are going to be that patient.”

WorldCom’s other options include supplementing the proceeds from any asset sales with a cash infusion from new investors, selling off its core businesses and selling the entire company.

The hardest part for WorldCom and its bondholders, banks and creditors will be deciding which route will produce the best deal.

The telecommunications industry is so decimated by debt and collapsing demand that dozens of firms have landed in bankruptcy, dumping equipment, networks and other assets onto the auction block. With each bankruptcy filing and sale, the prices seem to fall more, said Ajay Mehra, a portfolio manager and media and telecom specialist at Columbia Management Group.

“Valuing telecommunications is a fairly slippery slope,” Mehra said. “Right now, assets are selling for 10 cents on the dollar.”

In the last year, assets were put up for sale by wireless carriers Winstar Communications Inc. and Teligent Inc., by high-speed Internet carriers NorthPoint Communications Group Inc. and Rhythms NetConnections Inc., and by firms ranging from 360 Networks Inc. to Global Crossing Ltd.

Some believe that WorldCom’s assets can’t be compared to those of any start-up. After all, the company has about 20 million customers and is the nation’s second-largest long-distance provider, and its UUNet operation carries about half the nation’s e-mail and Internet traffic.

The notion that WorldCom assets are in a different league gained momentum in June, when Newark, N.J.-based IDT Corp. offered a deal worth $5 billion to purchase three parts of WorldCom--its MCI long-distance unit and its two local phone company operations.

IDT, a tiny company compared with WorldCom, said the two telecommunications companies have not had serious discussions about the proposal. But the offer still stands, IDT spokesman Gil Nielsen said.

“We’re still interested,” Nielsen said. “We’re monitoring developments, and we’re hopeful that we’ll hear from the creditors.”

Others believe the IDT offer won’t fly. Some analysts say WorldCom in its entirety is worth $14 billion. Pessimists believe it is worth as little as $4 billion, said Cliff Higgerson, a partner at ComVentures, a firm that invests in telecommunications companies.

It’s not that WorldCom’s best assets aren’t valuable but that the firm put up its for-sale sign during the industry’s worst downturn. Even the strongest players--the nation’s regional local phone companies--don’t want to spend precious cash unless they get the best of WorldCom’s assets: its business contracts and its customers.

Most European telephone companies are too weighed down with debt to go shopping for acquisitions. Analysts believe the best hope for a buyer might come from Asia, where telecom giants NTT, SingTel and others are comparatively healthy and have the cash and the ambition to make a deal in the United States.

One of the biggest assets that could go on the block is the MCI unit, which sells residential long-distance service, prepaid phone cards and some Internet service.

The upside is that the MCI business has a valuable brand name, generates millions of dollars in cash, can stay profitable with smaller overhead costs and has millions of customers. The downside is that the long-distance business is disappearing fast and competition is steadily eroding MCI’s market share.

Mehra, of Columbia Management, believes a fair price for MCI would be double the unit’s earnings before taxes, depreciation and amortization, or EBITDA. Valid financials are tough to come by, given the company’s admission that its 2001 and 2002 figures are unreliable, but based on MCI’s reported 2001 EBITDA, the price might be about $2.8 billion.

Selling UUNet, which in 2001 accounted for about 10% of WorldCom’s reported revenue, might fetch $10 billion to $15 billion, according to Willis of Meta Group. In May 1996, when UUNet was last sold, the price was $2 billion.

Another substantive business, WorldCom’s Digex Web hosting and services unit, could be sold for $500 million to $700 million, Willis estimated. The unit has about 600 customers, he said, and WorldCom’s funding commitment to Digex runs out at the end of the year.

Analysts had few encouraging words about the other assets WorldCom might be selling, including:

* Local phone companies Brooks Fiber and MFS, which were included in IDT’s $5-billion bid. Analysts say the local business is dominated by former monopolies, and the prospects for profits are bleak.

* Brazil’s Embratel Participacoes and Avantel, a Mexican telecommunications joint venture between WorldCom and Grupo Financiero Banamex-Accival. Both companies are struggling amid poor economic climates. Based on Embratel’s market value of $173 million Monday, WorldCom’s 19% stake would be worth about $33 million.

“Whatever they say those overseas things are worth, you could probably cut that number in half and be right,” Mehra said. “Those values have shrunk too.”

* SkyTel paging, which has customers but is stuck in a slowly dying business. Many paging carriers have filed for bankruptcy. Willis put SkyTel’s value at “a few hundred million dollars,” but added: “Why would you buy it?”

* WorldCom’s wireless services business, which is of nominal value because it is a resale business and doesn’t have many assets apart from its quickly dwindling customer base.

Times staff writers P.J. Huffstutter and Karen Kaplan contributed to this report.

(BEGIN TEXT OF INFOBOX)

Telecom Garage Sale

Asset sales will be a key part of WorldCom’s bankruptcy reorganization. Here’s a look at the company’s salable assets and what they might be worth in today’s depressed telecom market.

Date Purchase Potential

Business acquired price value

UUNet* May 1996 $2 billion $10 billion to (Internet) $15 billion

MCI Sept. 1998 $40 billion $3 billion (U.S. long distance)

MFS Dec. 1996 $12 billion $2 billion (Local phone service)

Brooks Fiber Jan. 1998 $3.3 billion $2 billion (Local phone service)

Embratel** Aug. 1998 $2.3 billion $33 million (Brazil long distance)

SkyTel Sept. 1999 $1.75 billion Negligible (Paging service)

CAI Wireless Sept. 1999 $476 million Negligible (Wireless licenses)

Avantel*** Nov. 1994 $810 million NA (Mexico long distance)

* Acquired by MFS, which was in turn acquired by WorldCom.

** Owns 19% stake