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MCI sheds Internet unit
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May 28, 1998: 5:03 p.m. ET
Eyeing merger, MCI sells backbone to UK's Cable & Wireless for $625M
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NEW YORK (CNNfn) - Hoping to clear the way for its planned merger to WorldCom Inc., MCI Communications Inc. said Thursday it will sell its Internet business to Britain's Cable & Wireless PLC for $625 million in cash.
Drawing criticism from opponents of the merger as little more than face-lifting, the sale comes as U.S. and European officials examine whether the planned MCI-WorldCom merger would concentrate too much control of the Internet in one company's hands.
MCI and WorldCom's UUNet unit are top providers of the high-speed Internet hook-ups through the so-called "backbone" network of Internet communication.
Karel Van Miert, the European Commission's antitrust watchdog, wants to ensure there is no overlap between their backbone services that could lead to monopoly control.
"By divesting MCI's Internet backbone, we have eliminated any overlap with WorldCom's Internet business," MCI Chairman Bert Roberts said in a statement.
WorldCom hopes to complete its $37 billion buyout of MCI this summer.
GTE Corp., a key critic of the MCI-WorldCom merger and itself a one-time suitor for MCI, quickly took aim at the sale.
"It doesn't remove the threat of Internet dominance though," said Peter Thonis, a GTE spokesman. "We look at this as a partial sale of parts of (MCI's) Internet infrastructure."
EU officials, who said the sale to Cable & Wireless could be a step in the right direction for MCI-WorldCom, say they will make their own determinations.
"We have to ascertain whether the sale is about the entirety of the Internet backbone business," said European Commission spokesman Stefan Rating. "If it is, it would be likely to address our concerns about the overlap."
The European Commission's competition minister has until July 15 to rule on the merger, and Rating said the sale of the Internet unit will increase its workload up to then.
Cubic Zirconium, not the Crown Jewels
Internet and telecommunications industry watchers said MCI's divestiture is more a nod to antitrust regulators than a real leveling of the playing field in Internet backbone.
"All MCI is getting rid of is its access network," said Eric Paulak, an Internet technology expert at the Gartner Group,. "What it gets rid of will be immediately replaced by WorldCom."
Much ado has been made over how much market share a combined WorldCom-MCI would have. In the nebulous Web world, it is admittedly tough to gauge, Paulak said, but he said the "real number" is just over 50 percent.
But, he added, "what nobody can dispute is that MCI and UUNet are losing market share in this backbone market."
"They are not selling the crown jewels of WorldCom, just some cubic zirconium from MCI," said Reed Hundt, former chairman of the Federal Communications Commission.
Did MCI get the right price?
The sale to Cable & Wireless values MCI's backbone services at about three times above annual revenues.
"When you look at valuations, it is certainly low," said Paulak. MFS Communications Inc., which merged with WorldCom in 1996, paid $2 billion for UUNet Technologies that same year.
GTE's Thonis said its investment bankers, which looked at assets at WorldCom as part of GTE's buyout plans late last year, said they valued MCI's Internet business at more than $4 billion.
Through the deal, MCI will sell its entire backbone. It comprises 22 nodes, which are of mainly fiber optic-based switching and router stations in major U.S. cities.
Cable & Wireless also buy MCI's 15,000 interconnection ports, the individual spokes out to customer servers, and some 40 peering agreements.
Cable & Wireless will take control of MCI's contracts with Internet service providers, but MCI's residential and non-ISP customers are not affected. MCI said it has more than 1,300 ISP customers worldwide.
For the next three years, MCI will direct its Internet service revenues through to Cable & Wireless, after which it will be able to move its customers through to WorldCom's UUNet. In the meantime, MCI in effect will pay Cable & Wireless to use networks MCI once owned.
On Thursday, MCI shares (MCIC) closed up 1-13/32 at 53-15/16 while WorldCom shares (WCOM) gained 15/16 at 45-5/8.
-- by staff writer Jamey Keaten
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