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WorldCom Inc filing with the SEC regarding its $30bn for MCI Communications Corp has revealed that the company is looking to BT to help the company cut the costs of the deal. The filing states that the company wants to meet promptly with MCI and BT to achieve a negotiated transaction that WorldCom believes could be structured as a pooling. Last week, when it announced the deal, WorldCom said it would use so-called purchase accounting to complete the transaction. According to WorldCom’s SEC filings, for the six months ended June 30, earnings at a combined WorldCom-MCI would have been 39 cents a share under a pooling transaction, 50% higher than the 26 cents a share it would have returned under purchase accounting. Although WorldCom is looking for a pooling of interests to cut the cost of the MCI acquisition the company will need to win rival MCI suitor British Telecommunications Plc’s backing for the move. To qualify for a pooling under SEC rules, WorldCom would first have to exchange its shares for at least 90% of MCI’s stock. But given BT’s 20% stake in MCI, only 80% of MCI shares are now available for the exchange. Accounting regulations rule out any WorldCom deal filed as a pooling of interests as BT holds 20% of MCI. WorldCom now says it is looking for BT to swap its 20% stake in MCI for a 10% stake in a WorldCom-MCI – or sell that stake on the open market, giving WorldCom an opportunity to acquire the shares. A pooling of interests is the prospect of a stronger earnings kick to a blended WorldCom-MCI than under the purchase method. In a pooling of interests, merging companies simply add the book value of their assets and liabilities. This method doesn’t create goodwill that would have to be written off annually against future profit. Under purchase-accounting rules, it would have to gradually write off up to $19bn of goodwill against earnings for as long as 40 years, slicing an estimated $475m out of annual profit each year along the way.

Provides BT with leverage

The arrangement provides BT with valuable leverage should it decide to back away from its MCI bid. Meanwhile, the MCI board is reported to be have begun its meeting to discuss how it will respond to the WorldCom bid. MCI would not comment on the reports. The MCI meeting could extend through Thursday. The company then is expected to issue a brief comment about the WorldCom offer by the end of the week but will withhold any statement recommending or rejecting the offer to shareholders. The three BT members on the MCI board, chief executive Sir Peter Bonfield, deputy chairman Sir Colin Marshall and Keith Oates, will be present but will not take part in discussions about the WorldCom bid. MCI sources said the 14-strong board was likely to instruct the company’s executive management to continue evaluating the WorldCom offer, which is worth $41.50 a share compared to BT’s offer which values MCI at $34 a share. One possible outcome of the meeting is an agreement from the board to initiate talks with WorldCom. At present, there is a clause in MCI’s BT merger pact barring negotiations with other suitors, one source close to the matter said. MCI is not required to advise shareholders on the WorldCom bid immediately. Under US regulations the board could wait until mid-November.

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CBR Staff Writer

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