Tue, Jul 23, 2002 page12

• WorldCom debt creates pain

  TELECOMS The impact of the company's bankruptcy, six times bigger than that of Enron, will create a tidal wave of unpaid debt that will hurt employees and suppliers

  • AP
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  WorldCom Inc's bankruptcy filing Sunday delivers a body blow to a sector already reeling from tumbling revenues, fleeing customers and shrinking long-distance rates.

  The company is tottering under more than US$30 billion in debt and the recriminations of an accounting scandal.

  

  WorldCom's former CEO, Bernard Ebbers, took the Fifth Amendment before the US House Financial Services Committee hearing on Capitol Hill on July 8.

  PHOTO: REUTERS

  Everyone connected to WorldCom -- competitors, employees and suppliers -- now await the pain.

  "This isn't going to be a ripple on a pond. It's a tidal wave from a boulder," said Jeff Kagan, a private telecom analyst in Atlanta.

  For suppliers and creditors, it's the possibility that WorldCom's debts might be wiped away by a bankruptcy judge.

  For competitors, it's the pain of losing investors fleeing all things telecom.

  For WorldCom's 63,000 workers, there are acute worries about future employment.

  "This is a case of lose-lose," said Scott Cleland, chief executive of the Precursor Group, a telecom research firm. "It's like a virus that gets spread to everyone. Suppliers get shortchanged. People who do business with them get shortchanged. A lot of bad debt will get absorbed."

  The one group that probably won't have to worry is WorldCom's telephone customers. Even if the company fails, authorities say its networks will keep operating until they are sold, or while the company works out its troubles.

  "I don't think customers will notice much," said Forrester Research's Carl Howe. "After a while you may get a different logo on your phone bill."

  Many doubt the WorldCom name will survive long.

  "They're a criminal brand, in the same group as Enron," said Patrick Comack, a telecom analyst with Guzman & Co. "I question whether WorldCom is a viable company, even without its debt."

  Down the road, however, a world without WorldCom could turn into a friendlier place for the remaining US telecoms.

  "This is going to be the big event that we're going to look back on and say `That was the turning point,'" said David Willis, a telecom analyst with the Meta Group.

  Beleaguered long-distance carrier AT&T Corp might feel some relief, especially if WorldCom's most lucrative business customers start looking to jump carriers.

  "It couldn't happen at a better time for AT&T," Willis said.

  AT&T spokeswoman Eileen Connolly said the company has been phoning WorldCom's corporate customers to assure them that it will be glad to handle their business. Some customers have contacted AT&T on their own, Connolly said.

  Sprint might also win some of those large customers, Willis said.

  Elsewhere, WorldCom might pose a tempting takeover target for one of the four remaining Baby Bell carriers, especially Verizon and SBC, analysts say. The carriers are said to be among the handful healthy enough to purchase the assets.

  One hot item could be WorldCom's Internet backbone unit, UUNet, one of the world's largest wholesalers of Internet capacity. UUNet is a solid revenue earner and crucial infrastructure provider, analysts said.

  WorldCom's Metropolitan Fiber Systems, another network provider, and Web site host Digex Inc could also become coveted assets.

  WorldCom's MCI long-distance unit might also be a takeover target, although its business, like that of AT&T and Sprint, has been losing business to local carriers entering the long-distance market, along with consumer use of e-mail and cell phone communications.

  Some say the gobbling of WorldCom could set off a healthy wave of mergers, thinning the ranks of competitors. Ironically, the future playing field might revert to domination by the telecom titans of the past: AT&T and its Baby Bell progeny.

  The worst case scenario for the industry is a WorldCom that sheds its debts in bankruptcy, only to resume aggressive competition -- reducing long-distance rates further in an attempt to gain subscribers, said Drake Johnstone, telecom analyst with brokerage Davenport & Company.

  ``That would be a disaster,'' he said.

  Even at pennies on the dollar, WorldCom assets are going to be a tough sell among telecom survivors, Cleland said.

  "The only players strong enough to consolidate have troubles of their own," Cleland said. "No one's willing to assume more risk and liability. This is an every-company-for-itself market. There is no quick fix."
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