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MCI, WorldCom shake on it

MCI Communications agrees to be acquired by WorldCom after the upstart telecom firm raised its takeover bid to $37 billion in stock and cash.

Beating out bids by British Telecommunications (BTY) and GTE (GTE), WorldCom (WCOM) announced today the $37 billion purchase of MCI Communications (MCIC).

Through WorldCom's subsidiary, UUNET, and MCI, the combined company will have Internet access through over 2,000 points-of-presence around the globe, making it one of the world's largest Internet service providers (See related story). The deal also will give MCI access to WorldCom's newly acquired CompuServe ISP as well as America Online's network services companies.

Additionally, the merger will alter the lower-profile segment of the market by reducing the already small number of players--fewer than 50--that collectively serve as the backbone of the Internet (See related story).

It is unclear what will happen with the MCI-British Telecommunications joint venture aimed at creating the world's largest private backbone network to be called Concert. WorldCom said in a press release that the new MCI WorldCom organization will become a nonexclusionary distributor of Concert products and services.

"I am inclined to believe that that partnership will become less important as more international services are provided through WorldCom," said Tom Aust, global telecommunications analyst at Citicorps Securities.

WorldCom raised its bid from $41.50 to $51 a share, which will be paid to MCI stockholders in WorldCom shares. British Telecommunications, which holds a 20 percent share in MCI, will receive $7.4 billion in cash for the Class A MCI shares it owns.

Once complete, the merger with MCI is expected to provide for 20 percent earnings accretion for the first full year as a combined company.

The WorldCom bid for MCI, which topped GTE's latest offering of $28 million, was approved by the board of directors of both companies, WorldCom said in a press release.

As a result of the transaction, and with British Telecommunications bought out, MCI shareholders would own 45 percent of the combined company, to be called MCI WorldCom, while WorldCom would hold 55 percent.

Aust believes that WorldCom has dealt in a very clever way with its shareholders' concerns. "By offering cash to BT [British Telecommunications], WorldCom managed to address equity holders' worries about dilution," he said. "And its balance sheet could still handle it."

MCI chairman Bert Roberts will become chairman of the new company, and Bernard Ebbers, chief executive of WorldCom, will become CEO.

MCI WorldCom is expected to have more than $30 billion in sales and serve more than 20 million customers worldwide.

Although the deal requires shareholder approval and needs to be cleared by FCC antitrust investigators, analysts believe that it would be hard for anyone else to beat WorldCom's offer, especially since BT and MCI are both in favor of the merger.