Saving WorldCom: An Impossible Dream?


How many times can you sell the same company? WorldCom (WCOM) Vice-Chairman John W. Sidgmore joked at staff meetings not long ago that he had sold his former Internet backbone company UUNET Technologies twice -- first to MFS Communications and again to WorldCom when it bought MFS. So why not sell UUNET again, this time to help raise cash to pare WorldCom's crushing $30 billion in debt? "Heck, I'd be happy to make a third fortune," teased Sidgmore, according to former staffers who attended the meetings.

It's no longer a joke. Sidgmore may have little choice but to sell UUNET now that he has been named president and chief executive of the Clinton (Miss.) company. WorldCom founder Bernard J. Ebbers, 60, resigned on Apr. 30 as the company's stock fell below $3 a share -- down nearly 80% since January -- and its bonds traded at less than 50 cents on the dollar. With earnings plummeting and debt payments soaring to $1 billion a year, the telecom giant has everyone from investors to customers betting it could eventually file for bankruptcy. "That prospect is scaring the daylights out of WorldCom's business customers," says Lisa Pierce, a consultant with Giga Information Group.

Can Sidgmore get WorldCom out of the deep hole dug by Ebbers? With his cocky, charismatic sense of humor, the 51-year-old Sidgmore is widely expected to win back the allegiance of spooked investors and big customers. Since moving to WorldCom with the MFS acquisition in 1996, he has earned the respect of both investment bankers and the big companies that use WorldCom's long-distance, data, and Internet services. In his first 48 hours as CEO, he called all of WorldCom's top 10 customers. "He's a good pitchman, and knows how to spin a long narrative that investors can believe in," says a former WorldCom executive.

UNWIELDY DEBT. But schmoozing Wall Street won't fix WorldCom's fundamental problem: The company's $30 billion in debt is more than it can shoulder, given the sharp slowdown in its core businesses. Sales are expected to plunge by $1 billion this year; growth in data services has decelerated to 3%, from 27% in the past two years; and the telecom market shows no sign of recovery.

Most industry observers believe Sidgmore ultimately will have no choice but to declare bankruptcy. Sidgmore insists that's not true: Worldcom has $1.4 billion in cash and an untapped $8 billion bank credit, and only $60 million in debt due this year. "We don't have a liquidity crisis," he says, "just the perception of a liquidity crisis."

The big worry for outsiders, though, is the $4.5 billion in maturing principal debt due in the next three years. Although the company says it will continue to generate $1 billion a year in free cash flow in the next three years -- more than enough to cover interest payments -- some analysts worry that the liquidity would dry up if the company's business continued to deteriorate. "Sidgmore will either have to sell the company -- and nobody wants to buy right now -- or restructure the balance sheet" through a bankruptcy, says Richard Klugman, a telecom analyst at Jeffries & Co.

SALES TALK. Sidgmore dismisses talk of bankruptcy as nonsense, just as Ebbers did. But unlike Ebbers, Sidgmore knows he has to sell off pieces of WorldCom to raise cash, and has launched a 30-day assessment of assets. "Ebbers' philosophy was to never sell anything," says Sidgmore. "My philosophy is that you need to continually evaluate your assets and sell those that aren't working out."

Industry insiders say Sidgmore's options are clear: The ever-declining consumer long-distance business, represented by a separate MCI tracking stock, should be folded back into WorldCom. That would eliminate a $71 million payout each quarter in dividends. Capital spending could be halved to $2 billion, considered the minimum to maintain the networks.

Sidgmore could also sell off low-margin businesses, such as a wireless-resale unit that generated just $310 million in first-quarter revenues and had no growth. In addition, analysts would like to see Sidgmore sell the long-distance consumer and wholesale businesses and parts of its international network.

Such pruning would leave WorldCom with its core business -- providing companies with long-distance service, Internet access, and data services. Those businesses bring in about $20 billion to $25 billion a year in revenues, and profit margins of 10% to 13%. That could make an attractive takeover target. Sidgmore may still get the chance to sell his company a third time. By Charles Haddad in Atlanta


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