WorldCom: What's Next?
Exactly how that will proceed and what will result is debatable. Some say there is already a pre-packaged plan in the works to get the company through bankruptcy court relatively quickly. Others say WorldCom’s battle is only beginning and that bankruptcy will likely be a knock-down, drag-out fight to the finish.
The Wall Street Journal reported this morning that bondholders, which hold $26 million in debt, are working on a pre-packaged deal that will get WorldCom through the courts relatively quickly. The idea is that bondholders will make out better in a fast court proceeding.
But there could be a snag in this grand plan. Although WorldCom is reporting revised cash figures of $2 billion, the final audit by WorldCom’s new accountants, KPMG, isn’t finished yet. And if large customers start leaving WorldCom for its competitors, revenues could continue to decline, putting the company on precarious footing. As a result, it’s likely that WorldCom could need to raise more cash in the interim, while a bankruptcy agreement is hammered out. The banks supplying this cash are likely to ask for collateral, putting them in line ahead of the bondholders in getting their money out in the case of a bankruptcy.
With all of this in mind, some analysts following the situation don’t believe that bankruptcy proceedings will go as smoothly as bondholders would like. Judging from history, this would seem a safe bet. Before Global Crossing Ltd. (NYSE: GX) entered into Chapter 11 proceedings, pundits also said there was a pre-packaged plan to get through the courts smoothly, but those plans have fallen apart and the company is still tangled up in court (see Global Garage Sale Coming? ).
“We cannot rule out the possibility of a pre-packaged filing that could be handled relatively quickly, but we believe it is more likely that the process will take time to play out,” said Legg Mason Inc. analyst Blair Levin in a research note published on Wednesday.
“In the interim we believe WorldCom must preserve the value of its operations and keep multiple avenues open for creditors to secure value,” he continued.
Levin’s note outlines four possible scenarios. The most likely, in his view, is that WorldCom’s business will remain relatively intact and will be sold to another carrier. The likely candidates to buy WorldCom are the RBOCs -- Verizon Communications Inc. (NYSE: VZ), BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Qwest Communications International Inc. (NYSE: Q). The downside to this scenario is that these players will likely face a long regulatory approval process and might be forced to dump some in-region operations to make the deal go through, said Levin.
The second possible option is that WorldCom will emerge from bankruptcy. This is likely to be the option with the least amount of regulatory hurdles and would be the cleanest financial solution. It is also probably management’s most favored outcome and the option that would most likely ensure that the company’s network remains intact and operational.
If no buyer emerges, then WorldCom’s assets, valued at over $104 billion, will be sold off piecemeal. IDT Corp. has already offered $5 billion for the company’s facilities-based operations and its consumer long-distance business. UUNet, WorldCom’s Internet backbone, would also likely attract buyers.
The fourth and final scenario would be that WorldCom would be forced to file for Chapter 7 bankruptcy, which means that pieces of the company would be auctioned off by the court.
“This is probably the least likely outcome but the most beneficial to the rest of the industry,” said Levin in his note. “Namely after a lengthy Chapter 11 process the company enters a Chapter 7 liquidation, where the assets dissolve away and the remaining customers transfer to other providers.”
— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com Check out Light Reading's July Research Poll on this topic to find out what others think about who's to blame for Worldcom's woes, and whether there are other skeletons in its closet.