MCI Communications Corp. By:Jim Hanafi, Austin Pluff, Natalia Kovaleva

Transcription

1 MCI Communications Corp. By:Jim Hanafi, Austin Pluff, Natalia Kovaleva

2 Agenda Future Forecast Financial Performance Past Financial Strategy External Funding Capital Structure Policy Recommendation

3 Future Forecast for Long Distance Industry Higher competition Faster innovation Use of fiber optic Expansion into international market

4 How can MCI become one of the major player? Investing in R&D Investing in better equipment Expand into other major cities

5 Financial Performance

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11 Stock Price ( )

12 Financial Policy Until 1976 The need to obtain funds for continuing operations dominated MCI s financial policy 1) The court's 1976 order preventing the extension of Execunet service to new customers restricted opportunity for growth and reduced the need for investment funds 2) Restrictive covenants associated with the bank loans limited MCI s ability to raise new capital for expansion Lease financing of new fixed investment was the only substantial source of funds available ) Agreement from the majority of the lending banks to a public offering of securities whose proceeds would retire MCI s loans 2) Arrangement for reduced loans to be bought out by private investors 3) Buying or converting a number of outstanding warrants and loans held by earlier investors

13 December 1978 MCI was able to enter the public capital markets for the first time with an offering of convertible preferred stock which raised $25.8 million September 1979 A second convertible preferred offering raised $63.1 million October 1980 A third convertible preferred offering netted $46.7 million

14 Benefits of convertible preferred stock A call provision Dividend on the preferred stock would be 85% tax deductible More stability and preferred status over common shares for dividends and bankruptcy to investors

15 The demand for investment funds intensified Policy shifted from offerings of convertible preferred stocks to convertible bonds April May 1982 After obtaining $102.1 million in a straight subordinated debenture issue, MCI raised $98.2 million in April 1981, and $245.9 million in May 1982 with convertible debentures Results 1) MCI raised $1,050 million from the public sale of securities 2) Uncertainties about the ability to raise funds in these quantities

16 MCI External Funding

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18 Capital Structure Policy Large amount of uncertainty in industry Access charges, market share, market growth Due to large funding needs, avoid straight debentures Keep low to avoid issues in downturns Choose either equity or convertible financing based on valuation of company Possible bias in choosing between convertible and equity Overall recommend a 60% debt and 40% equity policy

19 Current Financing Choices $500 million in 20 year subordinated debentures at 12.50% $400 million in common stock $600 million in convertible subordinated debentures at 7.625% convertible at $54 per share and shares per $1,000 $1,000 million package of debentures with 7.5% coupons and callable warrants for shares of stock at $55 per share expiring in 1988.

20 Valuation Assumptions WACC Assumptions Cost of Debt: 12.5% Tax Rate: 40% Risk Free Rate: 10.5% Market Rate of Return: 15% Beta: 1.5 Terminal Base Assumptions 3% Market Growth 20% Market Share 26.5% Access Charge 15% Operating Margin

21 Valuations Market: $5.508 Billion Subordinate Debentures: $4.120 Billion (70/30) Equity Assumption: $1.681 Billion (30/70) Convertible Subordinate Debentures: $3.117 Billion (60/40) Package: $3.584 Billion (65/35)

22 Choice Package Deal Ability to call warrants Still close in terms of capital structure Slightly smaller coupon

23 Sensitivity O p e r a t i n g M a r g i n Market Share 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 7% (4,757) (3,938) (3,334) (2,856) (2,458) (2,112) (1,803) (1,521) (1,259) (1,012) (776) (550) (332) (120) % (3,659) (3,049) (2,565) (2,159) (1,803) (1,483) (1,187) (910) (646) (394) (150) % (2,919) (2,405) (1,976) (1,599) (1,259) (943) (646) (363) (90) ,177 1,419 1,658 10% (2,354) (1,888) (1,483) (1,116) (776) (456) (150) ,258 1,525 1,789 2,051 2,310 11% (1,888) (1,444) (1,046) (679) (332) (1) ,231 1,525 1,816 2,103 2,388 2,671 2,951 12% (1,483) (1,046) (646) (271) ,096 1,419 1,737 2,051 2,362 2,671 2,977 3,281 3,584 13% (1,116) (679) (271) ,204 1,552 1,894 2,233 2,568 2,901 3,231 3,559 3,886 4,211 14% (776) (332) ,258 1,631 1,999 2,362 2,722 3,079 3,433 3,785 4,136 4,485 4,834 15% (456) (1) ,258 1,658 2,051 2,439 2,824 3,205 3,584 3,961 4,336 4,709 5,081 5,452 16% (150) ,204 1,631 2,051 2,465 2,875 3,281 3,685 4,086 4,485 4,883 5,279 5,675 6,069 17% ,096 1,552 1,999 2,439 2,875 3,307 3,735 4,161 4,585 5,007 5,428 5,847 6,265 6,683 18% ,419 1,894 2,362 2,824 3,281 3,735 4,186 4,635 5,081 5,527 5,970 6,413 6,854 7,295 19% 713 1,231 1,737 2,233 2,722 3,205 3,685 4,161 4,635 5,106 5,576 6,044 6,511 6,977 7,442 7,906 20% 988 1,525 2,051 2,568 3,079 3,584 4,086 4,585 5,081 5,576 6,069 6,560 7,050 7,539 8,028 8,515 21% 1,258 1,816 2,362 2,901 3,433 3,961 4,485 5,007 5,527 6,044 6,560 7,075 7,588 8,101 8,613 9,124 22% 1,525 2,103 2,671 3,231 3,785 4,336 4,883 5,428 5,970 6,511 7,050 7,588 8,125 8,662 9,197 9,732

24 Sensitivity B e t a Market Return ,725 5,334 3,749 2,637 1, ,768 5,226 3,584 2,454 1, ,811 5,121 3,427 2,283 1, ,855 5,018 3,276 2,121 1, ,898 4,917 3,131 1,969 1, ,942 4,818 2,993 1,825 1, ,986 4,722 2,860 1, W A C C Terminal Growth 1% 2% 3% 4% 5% 10% 3,525 4,020 4,654 5,499 6,681 11% 2,690 3,048 3,496 4,070 4,835 12% 2,030 2,297 2,621 3,027 3,547 13% 1,501 1,703 1,944 2,239 2,607 14% 1,072 1,227 1,410 1,629 1,896 15% ,147 1,346 16% % % (20) % (191) (141) (85) (22) 50 20% (336) (296) (250) (199) (141)

25 Conclusion Strong recent performance Competition and Innovation Recommend 60% Debt to Value Issue Package

26 Questions? Jim Hanafi Natalia Kovaleva Austin Pluff