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THE WORLDCOM BANKRUPTCY

2 Federal Agencies Intervene

Telecom: Justice Department seeks OK for an independent examiner; FCC joins proceedings.

July 23, 2002|JAMES S. GRANELLI and P.J. HUFFSTUTTER | TIMES STAFF WRITERS

Two federal agencies took the unusual step of jumping into WorldCom Inc.'s bankruptcy case Monday to ensure continued telephone service, monitor developments and uncover possible mismanagement, irregularities or fraud at the nation's second-largest long-distance company.

WorldCom's chief executive, meanwhile, vowed that the company would emerge within a year from the nation's biggest bankruptcy case ever, as it won court approval for a loan arrangement that gives it $750 million in cash now as part of a $2-billion package.

The action came in the first day of Bankruptcy Court hearings after the company's Chapter 11 filing Sunday night. The petition, available Monday, lists assets of $107 billion and debts of $41 billion, both higher than the company reported late Sunday.

The Justice Department is seeking court approval for an independent examiner to spend 90 days going over the company's activities. WorldCom agreed with the request, according to court documents, and bankruptcy Judge Arthur J. Gonzalez in New York is considering it.

The Justice Department, which already has a criminal investigation pending into an accounting scheme that overstated revenue by $3.9 billion, said it believes the step is needed to protect WorldCom shareholders' interest through the reorganization process. Atty. Gen. John Ashcroft said an independent examiner will provide "transparency" in reporting results and "enhance accountability."

"In turn, this should increase public confidence in the conduct of the case and help preserve value and protect the creditors and shareholders, including small creditors and those whose pension funds are invested in WorldCom," Ashcroft said.

The Federal Communications Commission sent Deputy General Counsel John Rogovin to the hearing as part of that agency's aggressive new interventionist strategy.

The FCC formally joined in the court proceedings "to protect the interest of consumers," said FCC spokeswoman Robin Pence. In recent bankruptcies involving Global Crossing Ltd. and other telecom firms, the FCC has dispatched agency personnel to monitor proceedings.

In past weeks, FCC Chairman Michael K. Powell has been under fire from prominent Capitol Hill lawmakers to explain what oversight and enforcement efforts his agency is undertaking in the wake of a string of big telecom bankruptcies.

WorldCom Chief Executive John W. Sidgmore told reporters early Monday in a New York news conference that the company's "reorganization here is not going to be a liquidation. I think our plan is going to be to keep the company intact."

But many aren't so sure. The company was reportedly down to $200 million in cash when it filed its Chapter 11 petition late Sunday. That means it has gone through more than $4 billion in cash and loan proceeds since the end of March.

A breakup of the Clinton, Miss.-based company has tremendous ramifications for a customer list that includes defense and government agencies and an industry beset by too much bandwidth and too little demand.

"This is not a seller's market, and there are not a lot of likely buyers," said David Novosel, a bond analyst at Banc One Capital Markets in Chicago. "I agree with Sidgmore that the real value is in the customers, the brand names and the relationships that have been built up, not in the pipes and switches in the ground."

Unlike most of the telecoms that built systems and went bust, WorldCom has 20 million corporate and residential customers and generated $8 billion in revenue in the first three months this year, rendering any breakup talk as premature to some.

"It has a very substantial and real business," said Irwin N. Gold of Los Angeles investment banker Houlihan Lokey Howard & Zukin, which is serving as a financial advisor to creditors.

Yet a plan to keep the company intact could produce a strong competitor that would keep prices low, destroy other companies and exacerbate an industry slump that already is predicted to continue for a year or two more.

"It's just perpetuating the pain in the industry," said stock analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va. "We need assets to be sold to incumbent carriers, not more companies on the scene."

Though having a healthy telecom industry is important, said industry lawyer Robert J. Rini of Manatt, Phelps & Phillips in Washington, "There has historically been ruinous competition."

In June, IDT Corp. urged its beleaguered rival to accept a $5-billion bid for its long-distance and local phone assets, saying the offer was the best chance to shore up the nation's telecom system.

The biggest chunks, all well-integrated and difficult to break off, are WorldCom's large business customers, its MCI long-distance service for consumers and small businesses and the UUNet high-speed data network. UUNet is one of the Internet's core data "backbone" providers and handles more than half of the nation's Internet traffic.

WorldCom officials declined to explore IDT's offer at the time, officials said.

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