British Telecommunications Plc’s reduced bid for MCI Communications Corp, valuing the US carrier at $21bn, has been dramatically trumped at the eleventh hour by WorldCom Inc in a move which could leave its global expansion plans in tatters. WorldCom Inc, currently the fourth largest long distance carrier in the US, has made a $41.50 per share stock offer valuing its long time rival MCI at around $30bn, a 41% premium over MCI’s closing share price and an excess of $9bn over BT’s recently revised offer. Under the terms of the deal, MCI shareholders would receive not less than 1.03 WorldCom shares for each MCI share. With both MCI and BT shareholders set to vote on approval of the BT/MCI merger within the next few months WorldCom is hoping its deal will appeal directly to MCI shareholders. We are making a superior offer to the shareholders of MCI to merge with our company. Our offer is superior to BT’s offer. We are offering a higher price, a higher premium and, most importantly, a higher performing stock,” said WorldCom chief executive officer Bernard J Ebbers. Ebbers said the $9bn premium derives from $2.5bn annual cost savings that his company could create from synergies with MCI within the first year growing to $5bn in the fifth year. BT can’t offer these synergies because they just don’t live here, he said. In addition, Ebbers maintains that MCI’s entrance into the US local telephone market would be less costly if it were to merge with the local networks already operated by WorldCom. It was MCI’s massive, unexpected costs related to the move into local markets, announced in July, which put the BT/MCI deal into jeopardy, and resulted in BT renegotiating a more than 20% reduction in the price it would pay for MCI. According to Ebbers, the deal would be accretive to WorldCom by 22%, accretive from day one. He said that Not a red cent is needed and it will, in fact, save us money.
Market verdict
Now with such a hefty premium offered to MCI shareholders, it is hard to see MCI’s shareholders voting to go with BT. But the markets quickly reached their own verdict. In London BT’s shares leapt 32.5 pence to 442 pence on 159m shares traded with James Dodd, telecoms analyst at Dresder Kleinwort Benson predicting a BT share price of over 500 pence if the WorldCom offer succeeds. On Nasdaq, MCI shares closed up $5.88, to $35.25 and WorldCom lost just one point, to $34.38. The consensus of opinion seems to be that BT could now legitimately walk away from a bad deal. In any case, according to Ebbers, the WorldCom deal will earn $1.2bn in increased value of its 20% holding in MCI should the WorldCom deal go through. At current stock prices, BT would own about 10% of WorldCom equity if the WorldCom acquisition of MCI is consummated, the WorldCom chief executive said, noting he would welcome BT participation on the WorldCom board of directors. However, should the WorldCom deal be accepted by the shareholders and not the MCI board, BT would not gain from a $450m penalty fee from MCI which was agreed should the board pull out of the BT merger. Following WorldCom’s press conference in New York on Wednesday, there can be no doubting the fact that chief executive officer Bernard J Ebbers is keen to brush the BT offer aside. He was asked why, if the deal made so much sense, he hadn’t acted sooner. Ebbers implied that BT had shot itself in the foot by lowering its offer. At $40 a share, we wouldn’t have been able to offer a significant premium. At $30 a share, we have been able to offer a significant amount. I don’t think MCI’s shareholders are very happy (with the BT offer) today, and we will let them decide. The terms of the BT deal were revised downwards in August from $43.50 to just $34 per share giving MCI’s shareholders just 25% of the enlarged group. Given that BT bowed to investor pressure to drop its offer price there seems to be little chance for the company to match the WorldCom offer. BT refused to comment on the WorldCom offer and MCI would only say that it had received notification from WorldCom and that its board of directors would meet in due course to review all issues and options. The WorldCom bid, if successful, would also greatly expand WorldCom’s global presence by bringing it into the BT/MCI Concert alliance. As for BT, which has built its global expansion plans around the merger BT/MCI company Concert Communications, according to Ebbers, plans for Concert would not have to change. Ebbers said he has not had any communication with BT regarding the MCI bid, but said there are advantages for all three companies to operate together. Asked if he was prepared to make a hostile bid in the absence of backing from MCI’s board he replied, We’re going to see this through. Although Ebbers said he said there is no reason for any regulatory objections to the WorldCom/MCI deal the merger of the US’s fourth and second largest long-distance operators may well bring close study from the FCC. Already opposed to the deal is the Communications Workers of America. The proposed takeover bid would create, along with AT&T, a virtual long distance duopoly, in sharp defiance of Congress’ intent in passing the Telecommunications Act of 1996, said CWA President Morton Bahr.
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