MCI prepares a comeback

The largest bankruptcy in U.S. history had one of the speediest journeys through court as the former WorldCom received approval of its Chapter 11 plan only 15 months after filing.

U.S. Bankruptcy Judge Arthur Gonzalez gave his stamp of approval on MCI’s emergence plan late Friday after delaying his expected decision all day. MCI is now set to emerge from Chapter 11 early next year, with a balance sheet containing a mere $6 billion in debt and a public share price on the lower side of worthless. Large bankruptcies usually drag out for years and considering the controversy surrounding WorldCom throughout the process, its 15-month stint to approval was relatively short.

An accounting fiasco sent WorldCom into bankruptcy in the first place, but throughout the process WorldCom faced pressures from all sides: federal investigations of its practices and former executives, outcries from consumer and fair business groups as well as the telecom sector, and a final scandal revealed when AT&T and other carriers accused the carrier of manipulating routing and termination of its calls for its own benefit.

"We know we have more work to do," said MCI chairman and CEO Michael Cappellas, the carrier’s third CEO since filing. "But starting now, you will see us drive even harder with more focus and determination to win the marketplace."

A newly emerged MCI, however, won’t necessarily have the competitive advantages a new streamlined and mostly debt-free company would expect to have. According to its filings in bankruptcy court, MCI projects net income of $500 million for the year on revenue of $24.5 billion with growth remaining almost flat for the next two years. It projects revenues of $25 billion for 2005, only 2% growth in two years.

But RHK found that even a 2% is optimistic and despite MCI’s advantages over competitors in its balance sheet, it faces major cash flow problems, which it must correct in the next year if it hopes to hobble much further beyond bankruptcy.

RHK President and Chief Analyst John Ryan said that MCI will have difficulty raising cash, increasing capex and paying for its ballooning operations unless it can correct the cash flow problem. While many carriers and industry experts have suspected that WorldCom would use its new debt-free status to launch a price war, Ryan said that MCI would suffer far more than AT&T, Sprint and other carriers if prices erode. In fact, sensing MCI’s critical status, those carriers may opt to launch a price war themselves, Ryan said.

Meanwhile, MCI still faces an investigation into its call termination practices, which may not have prevented it from emerging from bankruptcy, but it temporarily barred MCI from competing for government contracts. Government work accounted for an estimated $1 billion in MCI’s revenue last year. While none of its current contracts were canceled, a few have reached term and those contracts have gone to other carriers. Sprint has made efforts to jump into the breech, launching an IP network with no peering points into the public Internet. Sprint has announced three contracts for the new network since it launched this summer, one of which, the U.S. Army National Guard, was a former MCI customer.

MCI, however, has begun instituting new organizational and governance changes that the company hopes will offset concerns about its past business practices. In addition to hiring seven new corporate officers in the last 10 months, including new chief financial and operating officers, a new general counsel, an ethics officer and Capellas himself, MCI has completely revamped its board. Capellas said MCI would name its final three board members, giving the carrier 11 independent outsiders on a board of 12.