MCI preens for its coming out

With a nod from the judge overseeing MCI’s bankruptcy proceedings, the carrier has been cleared to emerge from Chapter 11 early next year.

Of the $40 billion-plus in debt the company had when it sought Chapter 11 protection, MCI should have less than $6 billion on its books when it starts anew. That’s more than the $3.5 to $4.5 billion it was hoping to end up with, but a fraction of what other companies are carrying – BellSouth, $14.9 billion; Sprint, $17.2 billion; AT&T, $17.4 billion; SBC, $18.2 billion; Qwest, $22.5 billion; and Verizon, $45.4 billion.

To put it in perspective, consider debt as a percentage of revenue. Even though MCI’s sales this year are expected to be about $10 billion less than the 2001 high of $35 billion, its debt will be only 24% of revenue vs., say, AT&T’s debt at 46%. The lighter load should make MCI more nimble and able to take bigger gambles, which is what scares competitors.

Another interesting change that will show up on MCI’s new balance sheet is an amazing swing in asset value. According to “Restoring Trust,” the report to the court about MCI governance by appointed monitor Richard Breeden, MCI listed $104 billion in assets in March 2002, with “approximately $45 billion in goodwill and $39 billion in the carrying value of its property, plant and equipment (sometimes referred to as PP&E). When it completes its opening date balance sheet on emergence from bankruptcy, the prior $104 billion in assets is likely to have been reduced to approximately $20 billion. The company has announced that it believes all its goodwill is permanently impaired (worthless) in value (if indeed such value ever existed), and that its PP&E should be written down by approximately $29 billion.”

The history detailed in the report is fascinating reading and the corporate governance ideas Breeden puts forth will result in MCI emerging from bankruptcy with some of the strictest, most-progressive management thinking anywhere.

But the market MCI emerges into is still troubled, best characterized by AT&T’s on-again off-again wedding dance with BellSouth. As nicely positioned as AT&T is with its modern network and reputation with big business, its efforts to find a regional Bell operating company partner is indication enough that colossal change is still to come.

It is not unreasonable to expect AT&T and MCI to be swallowed by RBOCs and the market to settle out with three or four national, all-purpose players. Until then, we welcome the diversity that a more-healthy MCI brings back.