Lost in all the hoopla Wednesday surrounding WorldCom Inc.'s $30 billion bid for MCI Communications Corp. was its $2.6 billion acquisition of Brooks Fiber Properties Inc., a local telecommunications provider based in St. Louis.
While the Brooks deal, which closed today, pales in comparison to the possible MCI coup, investors were paying close attention as Brooks Fiber stock shot up $8.31 per share, or 17 percent, to $55 Wednesday in afternoon trading.
Analysts said the Brooks acquisition dovetails with the proposed MCI purchase as it will give WorldCom even more muscle to infiltrate the local network market for mid- to large businesses.
"It's not too dissimilar from the MFS deal in that they're getting another major [competitive local carrier] to further entrench themselves as a viable competitor in the local business market," said Brett Azuma, a telecommunications analyst at Dataquest Inc. "Getting Brooks Fiber and then possibly getting MCI clearly puts WorldCom in the position of being one of the big boys at the big table."
Last year, WorldCom purchased MFS Communications, then the largest competitive local carrier, for $14 billion in stock.
Founded in 1993, Brooks is one of a handful of local carriers slugging it out with local telephone carriers for corporate customers. These companies essentially build the transport networks that connect businesses to larger networks.
Brooks' common stock will be exchanged for 1.65 shares of WorldCom common stock in a pooling transaction valued at about $2.6 billion. The acquisition expands the number of all the company's fiber optic local networks and switching facilities in the United States from 52 to 86.
Analysts judged the $2.6 billion price tag -- albeit a bit steep -- as fair, considering the superior gross margins WorldCom stands to reap by operating local facilities rather than co-locating.
"It's a bit rich in terms of what (WorldCom) is paying for Brooks, but compared to a $30 billion deal for MCI, it's just a speck," said Ted Levy, an analyst at Essex Capital Markets. "It's a brilliant and creative plan that shows (CEO) Bernard Ebber is committed to dominating this market."
Prior to Wednesday's announcement, Brooks Fiber had a market value of $1.8 billion. It has yet to turn a profit and company officials said the firm does not envision breaking even until the first half of 1998. In its second quarter, Brooks added 19,000 new lines and reported sales of more than $48 million in the first half of this year, more than triple the year-earlier period.
"Brooks is a well-run company with good management," said Joseph Arsenio, an analyst at Hambrecht & Quist. "It's one of the better carriers and they have deployed a lot of capital to build their networks. And they're going to have to spend even more money before they'll begin to see a profit."
Now it will fall on WorldCom to make those expenditures. But it shouldn't be much of a problem. WorldCom currently has a market value in excess of $33 billion and, if the MCI deal comes to fruition, will gain another $22 billion in annual revenue.