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Dawn of the dead telecoms
Global Crossing, XO and MCI, oh my! Investors should run from telecoms coming out of bankruptcy.
March 30, 2004: 1:12 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - In theaters, people are lining up to see "Dawn of the Dead." On Wall Street, investors are similarly infatuated with the newly undead.

The latest example is Global Crossing, shares of which are up more than 40 percent since March 22 when the company announced that Mexican billionaire Carlos Slim and his family acquired a 9 percent stake.

Global Crossing (GLBC: Research, Estimates), which in the 1990s made a big bet on a global fiber-optic cable network and wound up filing for bankruptcy in 2002, began trading again in January.

It's not the only telecom to rise from the depths of Chapter 11 and walk among the living again.

 
Shares of Global Crossing have taken off after the company announced Mexican billionaire Carlos Slim had invested in it.

XO Communications emerged from bankruptcy in January 2003 and new shares are up more than 25 percent in the past 12 months. XO also has a high profile investor backing it: financier and former corporate raider Carl Icahn is chairman of XO (XOCM: Research, Estimates) and owns more than 60 percent of the company's common stock.

And of course, the biggest telecom zombie of them all, MCI (formerly WorldCom), is set to come out of bankruptcy sometime in April. New shares will likely be issued soon afterwards.

Fundamentals are scary

So should investors bite on any of these companies? Romeo Reyes, an analyst who covers distressed telecoms for Jefferies & Co., doesn't think so.

He singles out Global Crossing as a particularly bad bet, despite the involvement of Slim, the chairman of two Latin American phone companies, Telefenos de Mexico (TMX: Research, Estimates) (Telmex) and America Movil (AMX: Research, Estimates).

"The average investor should be very careful of Global Crossing," Reyes said.

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Global Crossing reported that revenue in 2003 slipped 6 percent from 2002. In addition, the company said total telecom sales for 2004 should be 2 percent to 8 percent lower than last year. (The company is hoping to sell its Global Marine undersea cable installation business this year.) It also expects an EBITDA loss this year.

XO is slightly more intriguing. Under Icahn, XO is attempting to force some much-needed consolidation in the industry. The company is in the process of buying the assets of another bankrupt telecom, Allegiance Telecom.

But XO is still struggling as well. Sales in the fourth quarter slipped 13 percent from a year ago. And the company continues to lose money, although losses did narrow from last year.

And how about MCI? Because it will have a slimmed down balance sheet, many telecom experts expect it to immediately start a price war in order to steal business from the likes of AT&T (T: Research, Estimates), Sprint (FON: Research, Estimates) and the Baby Bells.

Timothy O'Brien, manager of the Evergreen Utility and Telecommunications fund, said he's skeptical that MCI will be able to pull that off. O'Brien said that MCI's gross margins over the past few months are significantly lower than AT&T's. "Usually it's the companies with higher margins that can withstand a price war," said O'Brien.

A brave new world

Others are banking on MCI being out of bankruptcy just long enough to start shopping itself. "That's the hope that a lot of investors have," said Reyes.

But Reyes quickly adds that it's tough to find a suitor that would make sense. SBC (SBC: Research, Estimates) and BellSouth (BLS: Research, Estimates), which co-own wireless firm Cingular, will have their hands full with Cingular's acquisition of AT&T Wireless (AWE: Research, Estimates).

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AT&T is probably not in a position to buy anybody.

That leaves Sprint, which is seen more as a possible seller now that it is recombining its FON and PCS (PCS: Research, Estimates) tracking stocks into one, and Verizon (VZ: Research, Estimates), which has been arguably the best performing large telecom and is probably not in need of making a big deal.

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The telecom landscape is tough enough for investors to figure out these days. Cable companies are looking more like phone companies, wireless is even more pervasive now than a few years ago, and the technology of making calls over the Internet (voice over Internet protocol or VoIP) is finally gaining in acceptance.

Add all that up and it creates a challenging environment for the Bells and long distance companies. And that will make it even more difficult for companies like Global Crossing, XO and MCI to be much more than niche players, said Jeff Kagan, an independent telecom analyst.

"The world has changed. It's like 'The Time Machine.' They fell asleep and woke up and the world moved past them," said Kagan.

That's all the more reason why investors should avoid the Chapter 11 casualties.

"This is really something for the grown-ups. If you have expertise in the area of telecom and the valuation and trading of distressed securities, fine but if you don't, it gets extremely complicated," said O'Brien.


Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.