MCI Starts a New Chapter

Telecom equipment makers regained a key customer today as MCI Inc. (Nasdaq: WCOEQ, MCWEQ), formerly known as WorldCom, emerged from Chapter 11 bankruptcy. But vendors queuing up for a gravy train will have to get in line behind creditors and investors.

MCI emerged with more than $6 billion in cash and about $5 billion in debt. That's a better cash-to-debt ratio than rival AT&T reported in its 10-K filed March 15 (at the end of 2003, Ma Bell had $4.3 billion in cash and $13 billion in long-term debt).

To settle fraud charges brought by the U.S. Securities and Exchange Commission, MCI will pay $750 million in cash and stock, which will eventually be distributed to investors hurt by the company's accounting practices and its bankruptcy. In addition, several U.S. states claim MCI owes about $1.5 billion in back taxes.

MCI said last month that its accounting fraud totaled $11 billion and led to a $74.4 billion reduction of previously reported pre-tax income for 2000 and 2001 (see MCI Restatement Hits $74.4B). For 2002, MCI had a net loss of $9.2 billion on restated revenues of $32.2 billion.

"Our plan in the next year is to invest 6 to 8 percent of revenues to build on the $38 billion capital investment that we've already made in our network to date," says Brittany Hoff, an MCI spokeswoman. A clearer picture of the company's estimated 2004 revenues will emerge when MCI files restated 2003 results with the SEC in the next 15 days.

Current capital expenditures underway at MCI include expansion of its global Multiprotocol Label Switching (MPLS) footprint, expansion of DSL service in the U.S., and installation of a U.S. ultra-long-haul network. MCI president and CEO Michael Capellas, in an interview with Reuters today, said wireless and data services will be top spending priorities for the company in the near future. Interestingly, MCI lacks a wireless division at a time when many customers are substituting wireless phones for land lines. But a wireless network build-out probably isn't in the cards. "It wouldn't make sense for them to go out and build their own network -- that would be too expensive at this point in the game," says William Cram, an analyst at Loop Capital Markets.

A more likely scenario is that MCI will become a mobile virtual network operator (MVNO), providing wireless service on infrastructure leased from another carrier. But which carrier would partner with the company is uncertain. Sprint PCS Group (NYSE: PCS) has been one of the most active providers of MVNO service but is unlikely to help MCI, its fierce rival in the long-distance business.

Data services offer more fertile ground for vendors eyeing MCI's capex budget. In a statement today, Capellas indicated that data will play a strategic role in determining which service providers succeed in the near future. "The real winner will be whoever is able to provide simple, converged products and services that can manage digitized content on a global IP network securely and reliably."

— Justin Hibbard, Senior Editor, Light Reading

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