WorldCom hopes to stay whole
NEW YORK (AP) – The crash of the telecommunications market, though hardly good for business, may buy WorldCom some time to work its way out of bankruptcy without being forced to sell key units like the MCI long-distance operation. There was no clear signal in the opening bankruptcy hearing, held Monday in a federal court in New York, as to whether WorldCom’s major lenders and bondholders favored a restructuring of the $41 billion debt they are owed rather than the sale of major assets.
Most of the hearing was dominated by procedural matters such as a $2 billion interim financing agreement, approved by U.S. Bankruptcy Judge Arthur J. Gonzalez, that will enable the cash-strapped company to keep operating.
The $107 billion in assets that WorldCom reported in Sunday’s bankruptcy filing, the biggest in U.S. history, might not fetch even 20 cents on the dollar in the current climate, according to numerous industry estimates.
“One of interesting dilemmas in this situation, where you have an entire industry in trouble, is that some of the most likely buyers of something like MCI might not be in a position to buy,” said David Skeel, a professor of corporate and bankruptcy law at the University of Pennsylvania.
As a result, creditors hoping to get back some of their money may be inclined to go along with plans to keep most of the company intact even if that means trusting a management team closely associated with the top executives who presided over WorldCom’s $3.8 billion accounting fiasco.
Notably, the Justice Department immediately asked the bankruptcy court to approve an independent examiner to investigate the scandal, underscoring the worry about whether current management represents a clean enough sweep from the past. Judge Gonzalez approved the request late Monday afternoon.
John Sidgmore, the company veteran who recently stepped in as chief executive, warned earlier in the day at a news conference that a liquidation of the company’s vast web of telephone and Internet “backbone” networks would leave creditors with less value than if they were kept together.
“The value of WorldCom isn’t in the switches and pipes we have underground. The value of WorldCom is the 20 million customers, the brands like WorldCom, UUNet, and MCI,” Sidgmore said. “The reorganization is not going to be of the ilk where you jump in and sell off all the assets.”
But, he added, “The courts and the creditors may feel differently.”
Still, industry analysts hesitated to estimate what price could be set for a business such as MCI, which WorldCom acquired in 1998 for $37 billion.
“Right now, it’s very difficult to value the company in a liquidation scenario. It would be better that they operate toward profitability,” said Joe Galzarano, a telecommunications debt analyst for CIBC World Markets. Galzarano also argued that WorldCom’s reorganization might go more smoothly with a company and industry veteran such as Sidgmore at the helm.
“Sidgmore hasn’t been tarnished yet, and at this point, I believe WorldCom is such a large entity that they need someone in there that has a sense of what the organization is about,” said Galzarano. “I think it’s a difficult environment for someone new to come in.”
Dave Peterson, an industry analyst for Fitch Ratings, agreed that “there’s going to be a degree of mistrust and lack of faith in management’s ability to execute. They have a long way to go in terms of building credibility with investors.”
But, he said, Sidgmore was not actively involved in running WorldCom at the time when the company hid the nearly $4 billion in operating expenses from investors.
“His involvement in the day-to-day management of the company really ended 1999 or 2000, so he hasn’t been around for the time when accounting shenanigans were going on,” Peterson said.