WorldCom to restructure
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October 31, 2000: 11:25 a.m. ET
No. 2 U.S. long-distance carrier to disclose plans Wednesday
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NEW YORK (CNNfn) - WorldCom Inc. plans to follow AT&T Corp.'s lead and will split the company into two units, as well as issuing a tracking stock for its consumer and wholesale long-distance divisions, a source close to the situation said Tuesday.
WorldCom Inc. will disclose its plans at an analyst conference Wednesday in New York. The telecommunications company intends to divide into a data and Internet unit focused on high-growth business, and a voice-based, high cash flow business. WorldCom also plans to issue a tracking stock for its slow-growth consumer and wholesale long-distance units, sources said.
CNNfn.com first confirmed the restructuring plans two weeks ago.
WorldCom's plans follow those announced by AT&T Corp. (T: Research, Estimates) last week to split into four new units -- AT&T Wireless, AT&T Broadband, AT&T Consumer and AT&T Business -- within the next two years. The highly complicated restructuring also will produce a tracking stock for AT&T's broadband unit, which includes its cable television, high-speed Internet access and multi-channel video operations.
The tracking stock for AT&T Wireless (AWE: Research, Estimates) also will be converted into a separate asset-based stock by distributing the remaining shares to current shareholders, likely during the summer of 2001.
"AT&T did a great job of lowering the bar," a source close to WorldCom told CNNfn.com.
Moves to restructure
Both AT&T's and WorldCom's restructuring moves were motivated by similar concerns: declines in core businesses such as long-distance, and falling stock prices, analysts said.
WorldCom is trading at less than half its 52-week high of $61.33 while AT&T is also well below its year high of $61.
Both also have failed to keep up with such rivals as Verizon Wireless and SBC Communications Inc. (SBC: Research, Estimates). "The entry of Verizon and SBC into long-distance markets in New York and Texas has led to erosion in market share for AT&T and WorldCom," Davenport & Co. analyst Drake Johnston said,
WorldCom and Sprint Corp. (FON: Research, Estimates) currently dominate the long-distance industry but are failing to match the low prices offered by new competitors, analysts said.
New York-based AT&T edged past third-quarter earnings estimates last week but warned that fourth-quarter profit from operations will miss analysts' forecasts due to continued pricing pressure on its long-distance business.
While AT&T is experiencing a revenue decline, WorldCom has yet to report a drop, but has given warning signs about future problems, Johnstone said.
Clinton, Miss.-based WorldCom, the No. 2 U.S. long-distance telephone company, reported a 26 percent increase in third-quarter earnings to $1.4 billion, or 47 cents a share, from $1.1 billion, or 37 cents a share, a year earlier.
WorldCom's revenue growth was weaker than expected in every segment except for its Brazilian subsidiary Embratel, falling to 8.1 percent in the third quarter from 13.3 percent in the second quarter, Credit Suisse First Boston analyst Dan Reingold said in a research note issued last Friday. Also, WorldCom's UUNet division, the world's largest Internet backbone and formerly a high-driving unit for the company, posted flat sequential growth of 26.4 percent.
Reingold added that WorldCom remains highly exposed to the voice long- distance market, with total voice revenues—which include commercial, wholesale, consumer and international voice—still comprising 65 percent of WorldCom revenues.
"We do not see much further downside from here and we look forward to the company splitting itself into two pieces," said Reingold, who maintained a buy rating on WorldCom shares.
WorldCom's plans are a preemptive strike to avoid AT&T's situation and split from its shrinking consumer and wholesale long-distance units, Johnstone said.
"They are moving to separate their businesses before they see a decline in revenue take place," he said. "This could be a good move if investors are willing to look at their business operations in a different light."
AT&T Corp. shares gained 69 cents to $23.31 in mid-morning trading Tuesday while WorldCom rose 19 cents to $25.06.
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