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MCI cleared to exit bankrupcy

The judge overseeing MCI’s bankruptcy approved the company’s plan to emerge from the biggest bankruptcy in U.S. history.
/ Source: The Associated Press

The judge overseeing MCI’s bankruptcy approved the company’s plan to emerge from the biggest bankruptcy in U.S. history, a financial reorganization that will pay back most creditors 36 cents on the dollar and erase $35 billion of debt.

The ruling Friday by U.S. Bankruptcy Judge Arthur J. Gonzalez comes 16 months after the company formerly known as WorldCom slid into disgrace after revealing it had fabricated $11 billion in profits.

It wasn’t immediately clear when the plan and MCI’s emergence from bankruptcy protection would officially take effect. Judges often set an effective date between one and three months after approval.

The reorganization plan is designed to give MCI a fighting chance at survival in an industry besieged by fierce price wars, sluggish business spending and competing technologies such as cell phones and Internet-based calling.

But a freshly cleaned financial slate and a new name will not, however, suddenly sanitize the company’s sullied reputation or wipe away its legal troubles, including charges of securities fraud in the company’s accounting deception and a federal investigation into the company’s telephone call routing practices.

Still, MCI emphasized Friday that it is a much different company now.

“We have spent the past 10 months building a world-class board of directors, recruiting seven new key executives, including a CFO (chief financial officer), a COO (chief operating officer), a general counsel and a chief ethics officer, and instituting a standard-setting corporate governance structure,” said Michael D. Capellas, MCI chairman and chief executive.

With 20 million customers, MCI remains the nation’s second biggest provider of long-distance and other communications services for consumers and businesses.

But contrary to the conventional wisdom, a nearly debt-free MCI will not be free to start slashing away at its troubled rivals AT&T and Sprint by cutting prices.

“Their profit margins are so tight, much lower than others, that basically any price war will make further erosion on their top line revenues and will immediately get them into negative margins,” said Muayyad Al-Chalabi, managing director for RHK, a telecommunications consulting and research firm.

“That doesn’t mean they don’t have to respond” to price wars, but “they really cannot afford any missteps,” Al-Chalabi said.

On the cost side, 85 percent of MCI’s revenues are eaten up by operating expenses that management would be hard-pressed to trim. The work force, for example, has already been reduced by more than a third to 55,000 employees, down from 85,000 before the bankruptcy.

In the meantime, analysts expect that MCI will need to ramp up its investment in technology to upgrade its network and services. Spending in those areas were cut back dramatically even before the company filed for bankruptcy amid sliding revenues due to price competition and sharp cutbacks in corporate spending.

MCI estimates that this year’s total investment in the company’s huge voice and data networks and other technological upgrades will total $1.2 billion. RHK estimates it at closer to $700 million.

Either figure is a far cry from the nearly $5 billion WorldCom spent on capital expenditures in 2001 and well below the $3 billion that archrival AT&T has projected for its full-year investment.

MCI’s target for capital investment next year is $2 billion.

“Over the last 15 months, they pretty much have restricted most of their capex to maintenance mode,” said Al-Chalabi. “They haven’t had a degradation in service, but they really haven’t invested in the future as the others have done.