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WorldCom warns, splits in two
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November 1, 2000: 3:55 p.m. ET
Guidance lowered for 4Q, 2001; split set for long-distance, consumer units
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NEW YORK (CNNfn) - WorldCom Inc. lowered its earnings and revenue guidance Wednesday for the fourth quarter and for 2001, while also unveiling plans that will split the firm in two and resend the former MCI long-distance business back into the public marketplace.
WorldCom also emerged as the second telecom to restructure in the past week, following declines in its core businesses. The nation's second-largest long-distance provider will create two new tracking stocks to reflect its Internet backbone business and its troubled consumer long-distance telephone business.
WorldCom said Wednesday it expects fourth-quarter earnings of 34-to-37 cents a diluted share, excluding goodwill amortization. Analysts surveyed by earnings tracker First Call had forecast earnings of 49 cents a share.
For 2001, the company said earnings should total $1.55-to-$1.65 a share, compared with the First Call forecast of $2.13. It blamed competitive pressure in the telecommunications industry, increased spending to support the company's growth initiatives, and other economic factors for the lowered guidance.
WorldCom's plan to split out its consumer long-distance business follows plans announced last week by AT&T (T: Research, Estimates) to split into four units, as both companies wrestle with declines in their core long-distance businesses and weak stock prices. It also follows WorldCom's failed $129 billion bid for competitor Sprint Corp. (FON: Research, Estimates), which was blocked by antitrust regulators in July.
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 CNNfn's Steve Young with the details on WorldCom's tracking stock plan. |
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In 1998, WorldCom bought MCI Communication Corp. for $37 billion.
Tracking stocks
WorldCom (WCOM: Research, Estimates) said the company will create two separately traded stocks. The core WorldCom stock will reflect its high-growth areas, including data, Internet backbone, Web hosting, business long-distance and local service, as well as its wireless and international segments.
The new tracking stock known as MCI will cover those businesses facing greater competitive challenges such as consumer long-distance as well as small business and wholesale long-distance and dial-up Internet access operations.
WorldCom CEO Bernie Ebbers acknowledged in an analyst conference Wednesday that the telecom should have disposed of some assets sooner.
"Management is not satisfied where we are today," Ebbers said. "This is not the best day of our life."
Analysts attending the conference noted the somber mood of WorldCom executives. One analyst, speaking off the record, said WorldCom's warning could have been much worse, while others differed.
"We can't imagine it being much worse than it was," said analyst Drake Johnstone, of Davenport & Co. "The company has lowered revenue guidance just about every month this year."
However, WorldCom executives maintained that the tracking stocks will be able to shore up the telecom's falling share price that has fallen to less than one-third of its 52-week high of $61.33. On Wednesday, WorldCom restructuring plans and earnings warning helped shares plummet by $5.12, or 21.58 percent, to $18.62.
The tracking stocks, Ebbers said, also give WorldCom time to decide if it wants to go forward with spinning off the units.
"If we decide want to do a spinoff we will address at that time," Ebbers said. "This allows an interim step if we choose to do it."
The slow-growing voice business currently comprises 30 percent of WorldCom's third quarter revenue, but the telecom plans to cut its holdings. By 2004, Ebbers anticipates that voice will only generate 11 percent of WorldCom revenue and added that the reduction could come sooner.
In July, WorldCom called off its $117.7 billion merger with Sprint Corp. when both companies declined to comply with conditions imposed by the Department of Justice. This time around, Ebbers does not expect the restructuring to require regulatory reviews.
WorldCom expects to file a registration statement for the restructuring with the Securities and Exchange Commission before the end of the year and will hold a special shareholder meeting in the first half of 2001. A stock distribution should occur no later than the first half.
A cash cow
WorldCom executives speaking at the conference emphasized that that the new MCI unit would focus primarily on cash generation. Revenue for the subsidiary is expected to fall to $15.2 billion in 2001 from $16.2 billion in 1999.
MCI will also account for about 7 cents per share of fourth-quarter results and about 25-to-30 cents per share of its 2001 earnings.
While the units included in the new MCI tracking stock produce only a fraction of the company's earnings, they still account for a majority of revenue. The "growth" areas to be covered by the WorldCom stock had combined revenue of $4.1 billion in the third quarter, compared with overall company revenue of $10 billion.
 The new MCI stock, to be traded on Nasdaq under the symbol MCIT, will be made a tax-free distribution to shareholders of a 100 percent interest in MCI. The new issue is to be completed during the first half of 2001.
Unlike WorldCom, which does not pay a dividend, the company plans to have MCI's tracking stock pay dividends of $75 million a quarter. It initially will be allocated debt of $6 billion, with the remaining WorldCom Inc. debt of about $17 billion to be allocated to the WorldCom tracking stock.
However, analysts were not positive in their valuations of the MCI stock. "Who would want a tracking stock in a company where revenue is declining," said analyst Drake Johnstone, of Davenport & Co. "I would recommend dumping it before the valuations go to zero."
Is Sprint next?
WorldCom lacks any real wireless strategy and is failing to take advantage of a prime growth area that would help it stabilize earnings, said Davenport's Johnstone.
Last week's announcement from AT&T Corp., which will produce four separate companies, also leaves the no major provider in wireless services.
"At this point every major telecom carrier worth his salt should be involved in wireless," he said. "Wireless is a growth area that WorldCom is not capitalizing on right now."
Ebbers dismissed speculation Wednesday that Nextel would make a good acquisition target, now that WorldCom has split off its slow growing consumer and wholesale long distance unit. "It would make sense for WorldCom to buy a business focused company like Nextel," Johnstone said.
One analyst attending the conference, that declined to speak for the record, told CNNfn.com that Sprint Corp. (FON: Research, Estimates). could be next to report declines. Sprint is also trading at less than one-third of its year-high of $75.93.
"I have an issue with Sprint's numbers going forward," the analyst said. "They are saying the opposite and seeing margin growth. We think they're wrong."
Sprint will probably announce next year that they are seeing declines, said Johnstone.
"Don't hold your breath if you think they are growing," he said.
Sprint fell $2.25, or 8.82 percent, to $23.25 in late afternoon trading Wednesday, while AT&T Corp. dropped $1.56 to $21.62. 
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WorldCom
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WORLDCOM WARNING AND SPLIT ANNOUNCEMENTS
