European arm sells itself down the river

The European arm of WorldCom last year sold the rights to its entire customer base back to its parent company for £70m.

The revelation means that if WorldCom collapses as a result of the $3.8bn (£2.5bn) accounting fraud exposed last week, its UK and continental European division will be worth less than a 10th of its book value, according to analysts.

The deal with its parent company is revealed in its latest accounts filed at Companies House. WorldCom refuses to reveal the names of its customers but they are thought to include BP, the London Stock Exchange and EDS.

As well as including its principle UK operation in the accounts, the European side covers subsidiaries in countries such as Italy, Spain and Denmark. The accounts show that it made a £15.6m loss for the year to 31 December 2000. WorldCom's auditor, the disgraced Andersen, points out that the business is being propped up at the US end and could be forced into administration if it does not have assurances of support from its financially stretched parent.

WorldCom is under investigation by the US Securities and Exchange Commission and is subject to a civil lawsuit in what is already being billed as a corporate scandal to rival that of Enron. It is the second US telecoms company to be hit by a big accounting scandal after Global Crossing filed for Chapter 11 bank- ruptcy protection earlier this year.

Global Crossing's UK arm, which was run as a stand-alone business, is in the process of being auctioned off and is expected to raise around £300m.

In contrast, telecoms experts believe that it would be difficult to disentangle WorldCom's European operation from the US, partly because it doesn't own its most valuable asset: its customer base.

In its accounts, WorldCom values its European telecoms assets – which are principally in England and Scotland and named "Trident" – at £508m. According to Eric Paulak, telecoms analyst at research group Gartner, "Worldcom would today be lucky to get £50m."

In yet another blow, a number of large European customers are making plans to take their business to rival operators should Worldcom collapse.

BP is one of the largest, having signed a $650m five-year contract with WorldCom in 1999.

BP refused to comment. But it is understood that after WorldCom issued a profits warning in April, the oil giant made contingency plans with a rival telecoms company.

Another customer, the London Stock Exchange, has a similar arrangement. David Lester, its chief information officer, said: "As a service provider, the exchange has a full range of contingency plans in place should WorldCom's position deteriorate further. [This would include] transferring WorldCom's responsibilities to an alternative service provider."

WorldCom's UK cable network runs in a ring joining up cities such as London, Brighton, Birmingham, Glasgow and Edinburgh. One of its biggest assets is an undersea cable linking the UK and the US.

Other telecoms companies, including BT, "lease" capacity on this network. Gartner's Mr Paulak said that if WorldCom's network went offline, "it would create a tremendous rippling effect on all other operators".