NEW YORK (CNN/Money) -
Will MCI, only recently out of bankruptcy, make it until the end of the year as a stand-alone company?
At least one analyst doesn't think so. Patrick Comack, an analyst with Guzman & Co., is betting that the former WorldCom will be bought out soon. In fact, he's so confident, he's even recommending the stock mainly because of the possibility of a takeover.
"MCI is gone," Comack said. "Sure, it's speculative but you've got to have a piece of this." (He doesn't own the stock and his firm has no banking relationships with MCI.)
Comack argues that MCI's long-distance network and corporate customer list with be an attractive fit for one of the three major Baby Bells: BellSouth (BLS: Research, Estimates), SBC Communications (SBC: Research, Estimates) or Verizon Communications (VZ: Research, Estimates).
During the past few years, the telecom sector has become an increasingly competitive one as traditional barriers separating long distance firms from local carriers have largely disappeared.
Many of the Bells have made inroads into consumer long distance and are trying to gain a foothold into the lucrative corporate market as well.
BellSouth has already been linked to merger rumors with MCI competitor AT&T since AT&T already has the infrastructure and corporate customer base in place.
"BellSouth has told the market it cannot get into the large global enterprise area without a network like MCI's or AT&T's and it has no intention of building one," said Comack.
There's a decent chance of a takeover...
Pricing in the industry has been cutthroat. And now that MCI has emerged from bankruptcy with a much lighter debt load, there have been increasing concerns about MCI using its slimmed-down balance sheet to initiate another round of price wars.
So it's probably in the best interests of all the larger telecoms to eliminate a competitor through consolidation.
“ MCI is gone. Sure, it's speculative but you've got to have a piece of this. ”
Patrick Comack
Guzman and Co. analyst
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MCI would seem to be a likelier target than AT&T because of its lower price tag. MCI's current market value is about $4.7 billion while Ma Bell, despite her myriad woes, still sports a marker vale of about $13 billion. Plus, MCI now has net debt (debt minus cash) of just $1.2 billion while AT&T's net debt level is more than $9 billion.
In addition, MCI needs the help of competitors to effectively sell a package of its services, known as bundling. The company announced an agreement on Monday, for example, to lease access to the local network of Qwest, the smallest of the Baby Bells.
"MCI's problem is it has to bundle its services using other companies' assets so it will never enjoy the types of economic returns that other telecoms can," said Albert Lin, director of research with American Technology Research.
Lin agrees that MCI would be a good fit for one of the Baby Bells, especially if it is successful in winning back customers through aggressive pricing and marketing.
"If MCI can take its brand, which is still substantial, and gain more customers, it would be more attractive to a larger telecom," said Lin. He doesn't own the stock and his firm has no banking relationships with MCI.
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Finally, MCI has also been seen as a more probable seller since CEO Michael Capellas, formerly the president of Hewlett-Packard, is not a telecom industry veteran. When he took the job, there was a lot of talk about how he would simply stick around long enough to get the company out of bankruptcy and then sell it.
According to terms of Capellas' employment contract, detailed in MCI regulatory filings, Capellas will receive restricted stock with a value of $12 million that vests over a period of three years for steering the firm out of bankruptcy. There is nothing listed in the terms about a bonus for selling the company.
A spokesman for MCI would not comment about merger speculation.
...but buying the stock is a roll of the dice
However, getting in on MCI is neither easy nor safe for the average investor. Shares of MCI (MCIA: Research, Estimates), which emerged from Chapter 11 bankruptcy protection in April, currently trade on the Pink Sheets, an unregulated listing service primarily for small, thinly traded stocks.
The Pink Sheet shares, which are mainly owned by MCI bondholders, will convert to common stock of MCI once the company begins listing on the Nasdaq, according to the MCI spokesman. That is expected to take place in the next few weeks but the ticker symbol for the Nasdaq listed shares will probably not be MCIA, the spokesman added.
But the shares have already plunged more than 40 since they first started trading in December.
Lin said he has no plans of initiating coverage on MCI because he doesn't think it will remain independent for long and is not willing to bet on how much a rival would want to pay for it.
Comack thinks the company could fetch at least $18 a share in a takeover, about 22 percent above its current price. But even he admits that the only reason he really likes MCI is because it could get bought for a premium. Because of the intense competition, he's pretty bearish on telecom as a whole.
"I don't like this sector. I don't like these types of companies. This is a sector that, at the end of the day after more consolidation, is still going to be a sick sector. So if you're going to invest in telecom, you have to buy a company with a takeover kicker," Comack said.
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