WorldCom Looks to Undo AOL Ad Deal

Beleaguered telecom giant WorldCom is seeking to back out of a commitment to spend millions of dollars for advertising on AOL Time Warner properties, the company disclosed last week in bankruptcy filings.

According to documents filed with the U.S. Bankruptcy Court for the Southern District of New York, which is handling Clinton, Miss.-based WorldCom’s record-breaking $41 billion bankruptcy, the nation’s No. 2 long-distance carrier and Internet backbone giant is looking to cancel an agreement signed in June 2001 that had it paying a total of $185 million to AOL through 2004.

In exchange for the payments, which come to about $20.25 million per quarter, AOL agreed to promote WorldCom’s MCI WorldCom unit on its online and offline properties.

For example, AOL said at the time that it planned to advertise WorldCom products and services in print through Time Inc. magazines, Time Warner Cable networks, and America Online brands including MapQuest, Digital City, ICQ, and Spinner, as well as FORTUNE.com and InStyle.com. The deal built on several separate earlier agreements with America Online and Time Warner, which were struck prior to their merger.

But now, however, WorldCom said it ought to be able to void the contract to get out of the payments.

WorldCom “has determined that it does not need the advertising services provided for in the agreement in its ongoing business,” it said in the filing. “The agreement requires the debtors to purchase more advertising than they need and requires the advertising purchased to be allocated between the AOL TW properties in a manner that is not favorable. Thus, the services provided under the agreement are unnecessary and costly to the debtors’ estates.”

U.S. Bankruptcy Code allows for debtors in possession to “reject any executory contract or unexpired lease,” pending court approval.

WorldCom said that by rejecting the agreement, it would save an estimated $81 million per year in expenses, and $182.3 million for the remainder of the contract.

The filing comes as the latest move by WorldCom to get its expenses back into line, while for AOL, it represents another potential injury for its already-troubled advertising business.

In addition, both companies are under federal investigation over accounting practices. WorldCom, of course, filed for the largest bankruptcy in history after revealing that $3.85 billion in expenses had been improperly booked. A month later, the company said it uncovered another $3.8 billion in accounting errors.

Last month, AOL disclosed in Securities and Exchange Commission filings that it might have improperly accounted for as much as $49 million in advertising and commerce revenue booked by America Online.

The problems, which AOL said it uncovered as it was preparing to have its executives certify its past results, involved three separate marketing deals over six quarters, starting in March, 2000.

At least one of those deals is believed to involve WorldCom’s UUNET subsidiary, to which America Online sold advertising, and from which it purchased dialup capabilities and bandwidth.