WorldCom set to buy MFS for $12 billion A phone giant to be forged from all-stock deal


In one of the 10 biggest corporate mergers ever, long-distance telephone insurgent WorldCom Inc. agreed to buy local telephone upstart MFS Communications Co. in an all-stock deal valued at more than $12 billion.

Industry experts called the deal an example of a wave of consolidation triggered by the new federal telecommunications law. The $200 billion U.S. telecommunications industry is scrambling to reorganize itself into a smaller number of huge virtual supermarkets where consumers can shop in one place for all their communications needs.

The deal unites the long-distance business of WorldCom, which has been on a buying spree that has given it 4.5 percent of the U.S. long-distance market, with the local phone service business and cable television franchise of MFS, which only Aug. 13 had completed its $2 billion takeover of Internet access provider Uunet Technologies Inc.

"Everyone is trying to position themselves to offer the whole thing to customers," said John W. Sidgmore, the Uunet chief executive who is slated to become vice chairman of MFS WorldCom. "This is the first one to do the whole thing."

Competitors such as MCI, Bell Atlantic and AT&T; said they also are moving to make themselves into what Yankee Group analyst Brian Adamik called "super-carriers." Some are beginning to offer services outside their traditional specialties through alliances with other companies, while others are trying either to make acquisitions or build new networks in order to get into new industries.

Experts said they expect the mergers to result in dramatically lower costs and a burst of innovation that will hasten the advent of new technologies such as Internet-based phone service.

Rick Kozak, chief executive of Annapolis Junction-based American Communications Services Inc., said buying MFS will let WorldCom nearly wipe out the biggest expense of providing long-distance service -- the money it pays local phone companies such as Bell Atlantic to complete calls over local networks that, unlike long-distance companies' wires, go into every customer's home or office.

Since MFS is already in the local-access business, competing with traditional Bell monopolies, it can complete calls for WorldCom, Kozak said.

"By owning their own local-access carrier, that cost theoretically goes to zero," said Kozak, who said local-access charges are between 40 percent and 50 percent of long-distance charges.

At the outset, only business and government customers will benefit from the WorldCom-MFS marriage. Both companies have built themselves up by focusing on business-to-business markets because they are much less expensive and less risky to enter.

"The consumer is not really the focus here," Sidgmore conceded. "Businesses were really the ones used to paying real money for communications services."

Bell Atlantic spokeswoman Sandra Arnette said the company is prepared to lose some of its traditional revenue as a result of other companies' mergers. The company will make up the losses, she said, when it is allowed for the first time to enter the long-distance market in states, including Maryland, where it has had a near-monopoly in the local phone service business.

"It will cut into some of our business, of course," Arnette said. "But we're going to cut into other people's business."

Bell Atlantic has also moved into the merger market itself in a major way, agreeing to take over Nynex Corp. in a $21.3 billion deal that, like WorldCom/MFS, is still awaiting regulatory approval. But Yankee Group's Adamik said yesterday's deal is different.

"This is the first significant merger between a long-distance company and a local-access company," Adamik said. "Before now, we've seen mergers between like and like."

The deal is also smaller than Bell Atlantic/Nynex. Based on the closing price of WorldCom stock on Friday, the deal would have been worth more than $14 billion with each MFS share being swapped for 2.1 shares in WorldCom. That value is 59 percent above Friday's closing price of MFS stock.

But the deal grew much less valuable yesterday, as WorldCom stock fell $3.625 to $22.75, reducing the deal's value to $12.4 billion. MFS rose $9.9375 to close at $44.8125, still well below the deal price.

WorldCom's drop, despite favorable comments from a prominent Alex. Brown Inc. analyst who follows WorldCom, stemmed partly from remarks by Chief Executive Officer Bernard J. Ebbers that the deal is likely to reduce WorldCom's per-share earnings for three years before beginning to pay off.

Ebbers will be president and chief executive of the combined company. MFS Chairman James Q. Crowe will be chairman. Sidgmore said the combined company's annual sales rate is $5.4 billion, based on second-quarter figures.

The lower WorldCom price would drop the deal to 10th place overall among all-time mergers, from fifth-highest based on Friday's close. By comparison, No. 5 on the current list is the $14.1 billion merger in 1989 of Time Inc. and Warner TC Communications, a marriage of two American titans.

There was a sense varying from wonder to disbelief at the wealth generated by the marriage of Uunet, MFS and WorldCom, three barely known offspring of an information age that still isn't fully formed. This is especially so because the deal puts a higher value on MFS WorldCom than the market capitalization of communication giants such as Sprint even though the combined companies are barely profitable.

But optimists said MFS could start making big profits anytime it chooses simply by turning off the spate of capital investment it needs to expand to new metropolitan markets. And they said the money to be made in chipping away at the monopoly of Bell operating companies is so huge, and MFS so well positioned to make it, that it justifies the risk.

Pub Date: 8/27/96

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