Description

I think the MCI Tracking stock is a short, especially for nimble accounts who can box the position around dividend time. MCIT will pay $2.40/year in dividends, so it yields 14% today. In sum, Bernie Ebbers' bankers are selling us a bill of goods here for the sole purpose of getting some undesirable problems off the WCOM sheets.

120 million shares were distributed by Worldcom in a 1:25 distribution, giving MCIT an equity cap of $2 billion. Worldcom allocated MCIT $6 billion of its debt and has the nerve to charge it a rate significantly higher (8.65%) than its own rate on the debt. More gallingly, Worldcom also "allocated" MCIT a $1.8 billion intercompany payable that surprised many observers. There is no guidance as to how MCIT ever pays this down. Perhaps worse yet, MCIT begins life with a $2.8 billion working capital deficit. I believe at least $500 million of this needs to be funded from near term results (so I call it debt).

Adding up all these items, the enterprise value exceeds $10 billion, versus about $2 billion in 2001 ebitda. [Hmmm . . . only 5x, but aren't some analysts using 2x for AT&T Consumer in their breakup models? Apples to oranges? Not really.]

Did I mention that spinoffs reeking of desperation have not performed very well over the last several years?

Anyway, the MCIT bull case is that they will be able to pay down a chunk of debt each year. As the long distance business declines (in a nice orderly pattern of -8%/year -- hah!), MCIT will maintain its cash flows by cutting capex and lowering debt expense. So the dividend will be maintained and . . . who knows a capex-starved MCI may rule the telecom world again someday.

I am somewhat critical for reasons that follow:

2001E sales are $14 billion. $3 billion is from wholesale traffic and most of the balance is consumer long distance. The basic rate is about 7 cents per minute although with various penalty rates and other charges, the all-in average rate creeps toward 10 cents a minute. I doubt this will be a competitive rate structure as the RBOCs enter the market. (Don't these same analysts make much less generous rate assumptions when modelling Qwest?) The wholesale traffic can also be rebid and lost entirely . . . and wouldn't it just be a hoot if Worldcom was the winning bidder?

So I don't foresee a smooth and predictible revenue decline or any amount of guaranteed recurring revenues. Tinkering with the rate of sales decline quickly puts the company at risk in mid-2003. But even under the orderly (-8% revenues/-5% Ebitda) model, the dividend starts to approach 90% of net income by late-2004, raising concerns. When these concerns surface, would you hold this paper at an illusory 30% yield (i.e. $6 per share)?

And lastly, don't ever dream about a sale or buy-in premium, because Worldcom has the right to buy in the tracker at no premium to market in the future.

Catalyst

The dividend looks secure only for a while and only under assumptions of nice neat and orderly decline in MCI's overpriced long distance rates.