MCI Bid Talk Gives Hope to Trapped Telcos

After months of speculation on Wall Street, it looks like MCI is finally up for grabs.

Leucadia National ( LUK), a New York-based insurance company and value investor, sought approval from U.S. antitrust regulators Monday to acquire at least 50% of MCI's common stock.

Shares of MCI and rival AT&T ( T) jumped 8% and 3%, respectively, on word of the move, which some investors see as an early sign of the long-awaited consolidation in the telecom sector.

If nothing else, Leucadia's interest suggests there may be some hope for hard-hit telecom stocks. Price wars and industry instability have crushed share prices across the sector over recent months. AT&T, for one, has lost a third of its value off highs reached this year.

"This could start a whole new round of mating dances," says Forrester analyst Lisa Pierce.

Bell Curve

Leucadia jumped into the phone business in 2002 when it acquired the failed Williams Communications, which emerged from Chapter 11 as WilTel. The deal gave Leucadia one of the nation's largest and most modern communications networks. The addition of MCI would give Leucadia an enviable business and government customer list as well as an enormous network. Leucadia representatives weren't available for comment.

Many investors have expected the Bells -- Verizon ( VZ), SBC ( SBC), BellSouth ( BLS) and Qwest ( Q) -- to broaden their scope by acquiring outfits like AT&T, MCI and Sprint ( FON). Tie-ups could help the big local phone companies, stuck with a declining core business, to serve lucrative government agencies and large corporations.

While previous informal discussions among telecom industry players have led to little formal action, Leucadia's move Monday may torpedo the torpor, says Pierce. "Since there is now evidence of at least one serious suitor, I think it could help speed up the process a bit," says Pierce, whose firm consults to all the major phone companies.

MCI emerged from bankruptcy earlier this year after collapsing as WorldCom under an $11 billion accounting scandal. New chief Mike Cappellas had hoped to refashion the Ashburn, Va., shop into an agile player, but pricing and regulatory setbacks have grown increasingly harsh.

Last month, as TheStreet.com reported, the company started to dismantle a sales unit that focused on small and midsize business, and set plans to abandon the consumer market. At the time, the move was seen as a reaction to a pricing-rule reversal that threatens to take away steep wholesale discounts the Bells have been forced to offer competitors like AT&T and MCI.

Trimming Down

Now some industry observers say MCI may be clearing the decks, exiting the consumer and small business markets to make the company a more appealing takeout target. As MCI withdraws from areas in which it competes with the Bells, a potential combination between a local phone giant and MCI would raise less of a concern among regulators about hampered competition.

The fact that a telecom-asset holding company like Leucadia is eyeing MCI could be good news for rivals, suggesting that industry asset prices have fallen to bargain basement levels. But a deal is no panacea, observers warn.

"You certainly have a data point now that shows someone thinks this business has value," says Jefferies & Co. analyst Rick Klugman. "But the fundamentals haven't changed. The long-distance business continues to deteriorate for both AT&T and MCI." Klugman has a sell on AT&T and no rating on MCI.

Also, as some observers point out, there is a big difference between owning telecom assets and operating a national phone service for demanding customers. The Bells' experience with customer service makes them a more fitting buyer of business service telcos like MCI and AT&T, say analysts.

"Leucadia wanting controlling interest in MCI is not welcome news to business customers," says Pierce. "I don't know what this will mean for the government contracts that MCI has, but business customers don't like uncertainty."

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