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WorldCom to restructure
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October 19, 2000: 1:25 p.m. ET
Long-distance firm to separate units, issue tracking stock, source says
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NEW YORK (CNNfn) - WorldCom Inc. intends to proceed with plans to issue a tracking stock of its consumer and wholesale long-distance units, a source close to the situation said, even as analysts Thursday questioned the logic of such a move.
WorldCom plans to announce plans for the tracking stock soon after it reports third-quarter earnings next Thursday, the source said.
In July, WorldCom CEO Bernard Ebbers disclosed he was considering restructuring the company. Ebbers said he was considering issuing a tracking stock for the consumer and wholesale long-distance units as well as selling the segments or spinning them out. At a Goldman Sachs conference Oct. 4, Ebbers reiterated plans to restructure the company.
Ebbers plans to restructure the company into two units, one designed for growth and the other for cash flow, the source said. WorldCom, the nation's second-largest long-distance carrier behind AT&T, plans to announce the tracking stock within the next few weeks, the source said.
Clinton, Miss.-based WorldCom declined to comment.
Declining units
WorldCom shares have plummeted in the past few months and currently art trading at less than half their 52-week high of $61.33. The company also is still reeling from its failed $117.7 billion merger with Sprint Corp. in July.
Since that time, the phone company has explored options for shoring up its falling stock price. In July, WorldCom (WCOM: Research, Estimates) reported that second-quarter revenue from the consumer and wholesale communication business edged up just 1 percent to $2.9 billion while WorldCom's overall revenue from communications services grew about 14 percent.
The consumer and wholesale units comprise a small chunk of WorldCom which, without the units, is valued at about $123 billion, analysts said.
 A tracking stock for the consumer and wholesale unit would allow investors to focus on WorldCom's more prosperous businesses such as data, Internet and International operations, analysts said.
At four times the second-quarter figure of $2.9 billion, the consumer and wholesale units would have annual revenue of $11.6 billion. Valuations for the combined units, once the tracking track is launched, range from $10 to $12 billion initially to as high as high as $20 billion.
Without the slow-growing units, revenue growth for the remaining WorldCom entity is expected to jump by as much as 16.7 percent from the current forecast of 12.5 percent in 2000, analyst Dan Reingold of Credit Suisse First Boston said in a research note. Estimates continue to climb for 2001, when Reingold expects revenue growth for the remaining entity to surge to 17.6 percent from the current 11.5 percent.
"WorldCom is frustrated because Wall Street investors just look at the total company," analyst Charles Disanza of Gerard Klauer Mattison & Co. said. "Wall Street isn't giving them credit for their growth."
The consumer and wholesale long-distance services once were the core of WorldCom's business but now generates little profit. CSFB's Reingold expects revenue for the combined consumer and wholesale segment to drop 4 percent to $2.9 billion for the third quarter of 2000.
If WorldCom does go through with plans for a tracking stock, it could offer tracking shares to investors directly in an initial public offering or distribute new shares to existing stockholders.
"Who would want to own a part of a division that would experience revenue declines?" analyst Drake Johnstone, of Davenport & Co. asked. "The market may be gullible enough to put a valuation on it, but I feel sorry for the shareholders that own any."
WorldCom is looking to follow the path set by Sprint PCS, the tracking stock for the wireless arm of Sprint, and AT&T Wireless Group. Sprint PCS (PCS: Research, Estimates) is well under it 52-week high of $66.93 while AT&T Wireless (AWE: Research, Estimates) hasn't closed near its IPO price of $29.50 since May.
"There is a precedent for a tracking stock," Johnstone said. "But it amazes me that the market would be able to provide valuation of [WorldCom's consumer and whole business]."
WorldCom shares gained $2.31 to $26.25, Sprint PCS rose $2.62 to $34.50, and AT&T Wireless Group gained $1.25 to $21.12 in mid-day trading Thursday. 
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