Earnings reports

Is It Too Late to Rescue WorldCom?

Maybe the changes at WorldCom Inc. (Nasdaq: WCOM) are coming too late.

That thought appears to be on a lot of people's minds, with WorldCom's stock dropping $0.06 (2.71%) to $2.15 on a day when most communications companies were celebrating a 7 percent rise in the Nasdaq Composite.

Many observers have already written off WorldCom completely, saying it's only a matter of time before the company's huge debt load catches up with it.

Although no one seems to think the company could be forced into bankruptcy this year -- only $172 million in interest and debt maturities are due in 2002 -- the coming years look grimmer. Next year the company has $1.7 billion in debt payments coming due, and the sum due in 2004 is a staggering $2.6 billion. As of March 31, WorldCom had $2.3 billion in cash and cash equivalents, according to its financial filings.

"Several years down the road, there’s no way they’ll be able to pay down all their debt," says a financial observer who has asked to remain unnamed.

The company sports a $29 billion debt load, so the question is a legitimate one (see WorldCom's Woes Mount, WorldCom Cuts Jobs, Gets Lower Ratings and WorldCom to Cut Capex?).

There are a few measures WorldCom could take to improve its chances of recovery, observers say. The first step -- the ouster of long-time CEO Bernard Ebbers -- has been accomplished, but it may have come too late. Ebbers, who became CEO of WorldCom in 1985, was replaced by the company’s former vice chairman John Sidgmore last week (see Sidgmore Takes Control at WorldCom). Experts said the longer Ebbers stayed, the less credibility the company had.

Ebbers' strategy -- aggressive acquisitions to build out the WorldCom network in anticipation of a demand that never materialized -- may have paved the road to the company’s demise. Not only did the acquisitions help load it down with debt, they are also the main focus of the SEC investigation that now looms over the company’s future. Another point under investigation is a $341 million private loan to Ebbers.

While Ebbers reportedly spent his last months on the job penny-pinching and eliminating perks such as coffee machines, Sidgmore has already said he will raise prices and has earmarked several businesses for potential sale, including minority stakes in telecoms in Brazil and Mexico. Investors are now looking to Sidgmore as the man to put WorldCom's house in order.

"[Sidgmore] certainly has a lot of credibility on the street, including with me," says David Bank, an analyst with RBC Capital Markets. But he adds, "It’s not going to be an easy turnaround."

While Sidgmore claims that sales of assets will raise as much as $2 billion, analysts say the assets in question probably are worth far less. "Personally, I think it’s only worth a fraction of that," says Richard G. Klugman, an analyst with Jefferies and Company. "I think they have limited options. We believe that the entire enterprise is worth less than the face value of [the company’s] debt."

No matter how much WorldCom gets for the assets, observers say the company will have to explore other options to stay afloat. For example, the company could repurchase $1.7 billion worth of debt due in 2003, saving $85 million in interest payments, according to Kaufman Bros. LP analyst Vik Grover. Grover, who put out a note yesterday urging investors to buy WorldCom stock, also suggests further capital spending cuts, headcount cuts, and putting the entire company up for sale.

[Nota bene: Grover is the same analyst who issued optimistic research notes on Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) just prior to that firm's default on $975 million worth of debt and its delisting on the Nasdaq. Could his optimistic proclamation be another grim indicator of WorldCom's chances?]

Although WorldCom doesn’t have to worry about running out of cash this year, the company should start worrying about its credit. At the end of June, $3.8 billion of the company’s bank credit line will expire. (In 2003, an additional $2.7 billion in bank credit could expire.) Without the credit line, WorldCom could soon face serious cash-flow problems. Observers say the company might try to hold the banks hostage by taking out its full line of credit before the expiration date. If this happens, the banks could lose a lot of money. If the banks extend the line with security, however, observers say they could make it out of the deal without losing a penny.

Some analysts say that the downturn in the economy makes it hard to tell how bad WorldCom’s particular situation is.

"If the economy picks up, it’ll be easier to tell if the company is losing traction [in the market] or if it’s struggling because the economy is so awful," says RBC's Bank. However, the fact that Broadwing Inc. (NYSE: BRW), Level 3 Communications Inc. (Nasdaq: LVLT), and Sprint Corp. (NYSE: FON) all recently posted better than expected financial results, while Qwest Communications International Inc. (NYSE: Q) and WorldCom’s latest results were extremely disappointing, doesn’t bode well for WorldCom, in his opinion (see Broadwing Reports First Quarter, Level 3 Reports Q1 Results, Sprint Reports Q1 Earnings, Qwest Posts Loss, Preps Asset Sales, and WorldCom Lowers 2002 Guidance).

The pending SEC investigation also clouds the analysts' crystal balls when it comes to WorldCom’s destiny. "The future of the company rests on the outcome of the [SEC investigation]," Bank says. "If it finds anything criminal, they don’t stand a chance."

So, while the market seems to be responding well to Sidgmore’s planned measures to save the telecom giant, observers worry that it might just be too little too late.

"He certainly has a big job ahead of him," Klugman says.

WorldCom officials did not respond to requests for comment on this article.

— Eugénie Larson, Reporter, Light Reading
Page 1 / 2   >   >>
skeptic 12/4/2012 | 10:26:53 PM
re: Is It Too Late to Rescue WorldCom? Ebbers' strategy -- aggressive acquisitions to build out the WorldCom network in anticipation of a demand that never materialized

That was NOT Ebbers' strategy. The strategy
was aggressive acquisitions to drive up worldcom's
stock price. The fundementals of the telecom
business were not something he was ever interested

netgenius 12/4/2012 | 10:26:49 PM
re: Is It Too Late to Rescue WorldCom? Worldcom is in dire straights....but what about the startups hanging their hats and hopes on Worldcom's Capex?
anonymous 12/4/2012 | 10:26:46 PM
re: Is It Too Late to Rescue WorldCom? You refer to the startups hanging their hats and hopes on Worldcom's Capex.

I wonder about large customers that an implosion would affect; like the US government, or AOL which outsources something like half of their dialup (AOL doesn't actually own their own modems) from WorldCom subsidiaries.

Do you think the government would let things get very ugly before they decided to "lend a hand"?

BackSlash 12/4/2012 | 10:26:46 PM
re: Is It Too Late to Rescue WorldCom? Worldcom's fate does have a large effect on the entire industry. Not to make any comparisons (ENRON) with other companies which have recently died... I think that the new CEO will try to cut and sell out of the areas which don't turn a profit in the SHORT term.. (aka Nortel mode).. No long term plans for network changes.. (big $$ changes).. but if a startup could come up with something that makes use of current network topology / properties and make it easier to run / manage / change ... well .. there you have it..

Comments are: I will not re-invent my network.. Make my network work better with what I have or prove to me that if I use your stuff, it will save me huge in cap / opex...
perry1961 12/4/2012 | 10:26:45 PM
re: Is It Too Late to Rescue WorldCom? "Several years down the road, thereGÇÖs no way theyGÇÖll be able to pay down all their debt," says a financial observer who has asked to remain unnamed.

No wonder he wanted to remain unnamed,LOL.What would happen if GE had to "pay down all their debt" due THIS year? In a word...bankruptcy.

These pundits are telling us that since WCOM may not be able to entirely retire bonds due in 2005,we should assume bankruptcy now.Companies roll over debt every day,so why is WCOM singled out for this treatment?
The part about WCOM possibly drawing down credit lines to threaten banks is also complete garbage.They have the cash to retire this AND next years debt.And,being cash flow positive....I can't believe the company is being trashed like this.
Capex was cut in half this year in order to maintain profitability.In a worse case scenario,WCOM has stated it can cut capex in half again.
That's right,profits! A p/e under 4.
You people are unreal...
New_guy 12/4/2012 | 10:26:44 PM
re: Is It Too Late to Rescue WorldCom? I wonder if these unnamed experts and other pundits will be as energized about admitting their mistakes in a month or two when Worldcom has cleared up any doubts about bankruptcy.
perry1961 12/4/2012 | 10:26:44 PM
re: Is It Too Late to Rescue WorldCom? I could understand if these "doubts" were about Worldcom's ability to make interest payments on its debt,but that isn't the case.
You see,the pundits know Worldcom is cash flow positive,profitable,and reducing debt.They also know any "potential" problems are years in the future.Where they are being deceitful(downright lying imo)is when they'd have us believe bonds MUST BE retired when due.More often than not,these bonds are simply refinanced.
Only Worldcom is expected to have enough cash in the bank today to pay off bonds due years from now.
What other company has this impossible standard?

I'd really like to know.Can someone name one?
cfaller 12/4/2012 | 10:26:40 PM
re: Is It Too Late to Rescue WorldCom? perry1961 wrote:
"Where [analysts] are being deceitful(downright lying imo) is when they'd have us believe bonds MUST BE retired when due. More often than not, these bonds are simply refinanced."

Refinancing bonds isn't as simple as making change for a dollar. Everything gets renegotiated, and everything gets reappraised. In addition to probably having to pay out a higher yield, WorldCom's assets aren't worth as much as stated, and they will have to write down assets to get a financial institution to buy out their old bonds and back their new bonds.

Since WorldCom will have to write down their asset value, they won't be able to borrow as much against it. With less money coming from the refinancing, they won't be able to cover all of the old debt with the new debt, which means they have to come up with the money from somewhere else.

NOBODY knows where WorldCom will come up with the extra money, and that is the real problem...
gely 12/4/2012 | 10:26:37 PM
re: Is It Too Late to Rescue WorldCom? Ebber's strategy was to build out as much fiber as possible, and being the CEO for 17 years makes him totally responsible for what happened under his tenure, 90% of the fiber World Comm has in the ground is unused, I give him credit for being ahead of the times, but ultimately all of the unused fiber is going to cost the company its future. Bye Bye World Comm!
Scott Raynovich 12/4/2012 | 10:26:01 PM
re: Is It Too Late to Rescue WorldCom? It's so insane that their bonds were downgraded to junk on 5/10
Page 1 / 2   >   >>
Sign In