MFS/Worldcom Merger
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MFS/Worldcom Merger
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(FOOL CONFERENCE CALL SYNOPSIS)* By Chris McKayz ALEXANDRIA, Va., August 26, 1996/FOOLWIRE/ --- WorldCom Inc. said today that it has agreed to purchase MFS Communications Co. for $14.4 billion, creating an huge "end-to-end" service provider, integrating local, long distance, international and Internet services. This comes soon after MFS had completed a $2 billion dollar purchase of UUNet Technologies Inc., a provider of Internet access to businesses.
"Rarely in business do we have the opportunity to bring together the premier growth companies from every segment of an industry to create a faster, more entrepreneurial, competitor with a unique product," said Bernie Ebbers, President and CEO of WorldCom. He indicated that this merger will create the first major provider of full-service business communication services, meaning long distance, local, international, and internet.
The merger itself involves a tax-free exchange of 2.1 WorldCom stubs for each MFS Communications stub. The merger is obviously still subject to federal and state regulatory approval, as well as shareholder approval, but the company hopes to have the merger completed within eight months. The merger involves a fixed exchange rate with no collars and strong closing assurance provisions, including a $350 million break up fee and a 20% option opportunity on either side. The board of the new company will be split 8-7, with WorldCom retaining eight seats.
WorldCom's goodwill will continue to be over 40 years, while the UUNet portion of the transaction will be over five years or less, which will involve about $2 billion dollars. The balance of the transaction, it appears at this time, will be over 40 years, for about $10 billion.
Financial Highlights
The combined company has 2Q 1996 revenue run rate of $5.4 billion. Revenue is growing at 28%, which includes WorldCom at a rate of 19% and MFS and UUNet at a 79% clip. MFS WorldCom will have $2.5 billion in available liquidity and huge potential for immediate and long-term synergies, both hard and soft.
WorldCom
WorldCom is the fastest growing and most efficient of the four largest long-distance companies. It is focused on business customers including large accounts, medium and small business accounts and wholesale companies. They own and operate 11,000 miles of fiber-optics in their U.S. network, and have 9,000 miles under construction for a total of 20,000 miles of U.S. fiber optic lines. They also have a substantial international capacity. WorldCom is recognized for their ability to create shareholder value. WorldCom's annualized revenue is $4.5 billion with an industry-leading cashflow margin of 27%. The net earnings for 2Q 1996 were $400 million before a one time charge. The company employs 7700 people.
MFS
MFS is a facilities-based communications company serving the end-to-end needs of customers. They have a presence in 52 cities and 227, 000 miles of local networks. In addition, the company operates seven local fiber networks in Europe and is a major UK. They were the first to construct similar networks in France, Germany and Sweden.
The company's first revenues were in 1989 and they achieved annualized 2Q 1996 revenues of $929 million. They have recurring revenue CAGR of 125% since 1990. MFS has 4,000 employees, including 1200 sales professionals.
UUNet
UUNet is a leading provider of internet-based services to the business community. It is the world's largest internet service provider focused on the business marketplace. It has a comprehensive range of internet access, security, consulting, and web-hosting services as well as a high performance network structure. They maintain 745 points-of-presence, 451 outside the U.S and are a primary access provider to the Microsoft Network. A fast growing company with a CAGR of 160% since 1994. Annualized 2Q 1996 revenues were $228 million dollars. The company is earnings positive, which is a rarity in the Internet business today. UUNet employs approximately 800 people.
Reasons for the Merger
The companies are coming together due to two seismic changes in the industry -- telecommunications deregulation, a global phenomena, and the move to a whole new different type of technology, the Internet, which represents a move away from the traditional voice network to a radically new type of network.
1) Deregulation -- The event of the year, maybe of the decade -- the first rewrite of Amercian telecommunication law since 1934 and the accompanying FCC interconnection order. Together, these form about a 1000 pages of legislation and regulation, with hundredes of individual provision, but they can be summed up in a few simple points. For the customer, deregulation provides one-stop shopping; the customer is able to get his/her service from a single, integrated, end-to-end supplier. Local, long-distance and internet and intranet service, all on one bill, with one person to call if there is a problem. From a carrier's point of view, the legislation means that a successful carrier will have to respond to this set of customer's needs. It is clear, that if companies are going to respond, they will have to do so with their own networks and their own switches. The company feels it is useful to examine the Generic Network Margins for the different segments of the industry. These margins measure only revenue minus network expense, without accounting for the cost of sales, general and administrative costs, or interest expense.
a) Pure Resale Service: as is contemplated by the FCC order, a company can expect a gross margin of about 20%. It is pretty apparent that after subtracting expenses that a company providing this type of service will be in the red from the start.
b) Switching Service: Adding ones own switches necessitates a large amount of capital, but this moves the gross margin in the 40% range. This will produce anemic returns, however, when you figure that the industry has expenses in the 20% to 30% range.
c) Facilities-Based Carrier: What has been created in the MFS WorldCom merger. One carrier providing local networks, long distance networks, local switches and long distance switches. Gross margins of about 60% are possible. MFS WorldCom is focussed on capturing these 60% margins, and they believe that they can, in fact, do better.
2) Internet -- The most important innovation in telecommunications since the switch network. Important for two reasons (1) It is cheaper than any alternative, and (2) It is improving much faster than anything else. A great deal of traffic will move over to this network in a very short period of time. This move will start with fax and information that is already in file format, and inevitably other types of communication will follow.
Summary
In summary, revenue growth from the combined companies will be in excess of 30%. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) growth will be in excess of 40%. Earnings before goodwill amortization become accreted within three years after closing of the merger, and net income in the three to four year range. This merger is justified by the hard synergies, or cost reductions, the company can achieve in the short term. The company will also have tremendous opportunity in the long run on the revenues side. The company will have 500,000 business accounts to which they can sell combined long distance, local, and internet service. They believe they have the financial strength to do so, with $1.6 billion in cash, $800 million in available liquidity and a net-to-book capitalization of about 15%.. Thus, regulatory change and the Internet have created unprecedented opportunities and MFS WorldCom believes they are in the right spot, with the right networks at the right time to take advantage of these opportunities.
* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |