Worldcom......files for Ch11 (bankruptcy)

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    Don't know how much of this news is already expected (factored in) but can't be a good headline leading into Monday:

    CLINTON, Miss. (CBS.MW) -- Cash-strapped telecommunications giant WorldCom is filing for bankruptcy protection Sunday, the company's CEO said.

    The Chapter 11 filing would mark the biggest bankruptcy ever, eclipsing Enron's meltdown.

    "The first priority was to stabilize the company financially," John Sidgmore told the Associated Press, referring to the receipt of approximately $2 billion in debtor-in-possession financing. "We don't think that there will be any significant impact on the employees and vendors, for that matter, and we should have plenty of cash to make it."

    Sidgmore said the company will look at selling some of its noncore assets, and that "potentially includes some of our Latin American facilities" and wireless resale business. "Certainly not UUNet or MCI or any of the core assets."

    Service to customers is expected to continue uninterrupted, at least for a time. During the process, WorldCom would have access to between $500 million and $1 billion.

    WorldCom couldn't immediately be reached for comment Sunday afternoon.

    The restructuring may take place without Sidgmore at the helm, according to published reports, because creditors want management not associated with the company's $3.9 billion accounting misstatement.

    According to earlier reports, several dozen companies that hold about $28 billion in WorldCom paper had been hoping to convert that debt into an equity stake in a newly capitalized WorldCom.

    Recent speculation has centered on banks providing WorldCom with debtor-in-possession financing while executives try to work out a prepackaged bankruptcy filing with the bondholders of the debt.

    Banks first in line

    Without a preset bankruptcy deal, banks would jump to first in line among WorldCom creditors, giving bondholders incentive to strike a quick deal to reduce the chance of an outright WorldCom failure. Right now, banks and bondholders would have equal weight in a bankruptcy proceeding.

    WorldCom claimed about $103.8 billion in assets at the end of the first quarter, though analysts believe the company's value is only a fraction of that. On that basis, a WorldCom filing would surpass last year's $63.4 billion Enron failure.

    In the past week, Sidgmore had indicated time was running out and that bankruptcy might be unavoidable. Meanwhile, the company had been working to line up financing to sustain operations during a bankruptcy proceeding.

    Since WorldCom confessed last month to hiding $3.85 billion in expenses, its cash reserves have evaporated quickly. Bank lenders nullified one backup loan and sued for the return of another $2.65 billion credit line.

    Pay first, talk later

    At the same time, nervous WorldCom's suppliers have demanded upfront payment, adding further strain to the company's precarious finances. The company had declined to comment on past speculation.

    Shares of WorldCom (WCOME: news, chart, profile) slipped 3 cents to 6 cents in Friday action. Most analysts have been expecting WorldCom to end up in bankruptcy court, which could render those shares worthless. Several years ago, the stock traded as high as $64.

    Still, analysts say it's highly unlikely the company would be forced to shut down its network, which caters to 20 million American consumers and carries as much as half of all the world's Internet traffic. As a last resort, federal regulators or even the Congress could step in.

    If WorldCom manages to find accord with its debtors, it might be able to start fresh or present a more compelling takeover target for a healthier phone company, such as one of the Baby Bells.

    For now, many Washington lawmakers are loath to accept the sale of WorldCom to a Baby Bell. Such a deal would need government permission, but Congress would view it as a major setback to landmark legislation six years ago aimed at promoting competition in the phone industry.

    Washington split on takeover

    Earlier this week, several influential lawmakers criticized Federal Communications Commission Chairman Michael Powell after he suggested that a Baby Bell might have to be allowed to buy WorldCom to ensure the survival of its network.

    "We do not believe the present economic difficulties in certain segments of the industry justify a relaxation of carefully established principles against combining local and long distance phone companies, nor do we believe such consolidation furthers the goals of the 1996 Telecom Act," wrote Sens. Herb Kohl, D-Wis., and Mike DeWine, R-Ohio.

    Kohl is chairman of a key Senate antitrust committee. DeWine is the ranking Republican.

    The Baby Bells, for their part, are unwilling to pay a hefty price for WorldCom and want to be shielded from any legal liabilities. WorldCom is facing an array of shareholder and other lawsuits charging the company with fraud.

    In late June, WorldCom fired Chief Financial Officer Scott Sullivan for treating $3.85 billion in ordinary expenses as long-term capital investments.

    The company is restating financial results to erase reported profits over the past five quarters. Investigators hint that the restatement could increase as more accounting irregularities come to light.

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