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Qwest Might Be Targeting MCI ; $6.3 Billion Deal Would Net Major Springs Employer

Posted on: Wednesday, 23 February 2005, 03:00 CST

Denver-based Qwest Communications International may buy MCI Corp., the nation's No. 2 long-distance telephone company, in a $6.3 billion deal that could be announced as soon as next week.

"It's likely that they are talking. The only question is how serious it will become," Lisa Pierce, a telecom analyst at Forrester Research, said Thursday.

Qwest and MCI, both still recovering from financial scandals that have hobbled their businesses, declined to comment on discussions reported Thursday by The Wall Street Journal.

MCI is also talking to Verizon Communications, the Journal said.

Qwest is the dominant provider of local phone service in 14 states, including Colorado, where it controls 85 percent of the phone lines in the state.

MCI is one of the biggest private employers in Colorado Springs. The company employs about 1,200 high-skill, high-wage technology workers at its campus on Garden of the Gods Road. Sixty percent of MCI's Colorado work force is in the Springs.

Word of the discussions erupted only three days after SBC Communications said it's buying AT&T Corp. for $16 billion.

MCI has been shopping for a buyer since it emerged from bankruptcy last spring.

Like its long-distance rival AT&T, the company has been hurt by shrinking revenue, price wars and competition. While its residential base has eroded, MCI continues to serve high-spending business clients that Baby Bells like Qwest hope to tap.

"Ultimately, what we are talking about is that the most powerful companies in the communications industry are those that have their own access into customer sites and that favors incumbent local exchange carriers like Qwest," Pierce said.

A Qwest-MCI combination would pair one of the nation's big local phone companies with a struggling but sizable longtance carrier with an enviable base of corporate and consumer clients.

Beyond that similarity, however, industry observers see the strategic fit between AT&T and SBC as far superior on a variety of fronts, especially since several years of financial and legal woes at both MCI and Qwest have handicapped their abilities to compete for customers and invest in their network assets.

"This one is really strange and hard to think about as a combined company," said Muayyad Al-Chalabi, managing director of the consulting firm RHK.

There's little reason to doubt MCI and Qwest have been talking. It's widely known that MCI has been looking for a buyer since emerging from bankruptcy with its balance sheet cleaned of debt, its name changed from WorldCom and its headquarters moved from Mississippi to Ashburn, Va.

And with the industry landscape suddenly changed by the SBC-AT&T deal, most observers see a greater urgency for local Bells like Verizon and BellSouth Corp. to pair with long-distance players such as MCI and Sprint Corp. if they are to stay competitive in a market already plagued by price wars.

"If (Verizon) could buy Sprint at the right price, they'd buy it," James Kahan, SBC's top executive for mergers and acquisitions, said Tuesday at a meeting with investors to discuss the AT&T deal.

He dismissed Verizon's assertion last week that the AT&T deal was no reason to change course.

"The way they look at the industry today is different from the way they were looking at the industry a month ago," Kahan said.

As the two weakest entities on both sides of the local-long distance fence, MCI and Qwest aren't viewed as the most likely or logical combination. Instead, both are seen as needing to be acquired by stronger players.

The big WorldCom bondholders who are now the biggest owners of MCI stock, though eager to cash in before MCI's revenues and customer base shrink much further, may not want their reward paid in a currency as questionable as Qwest's shares.

Qwest lost $1.66 billion in the first nine months of 2004, including a $250 million fine to settle a civil fraud case brought by the federal government.

But although Verizon and BellSouth appear to be more appealing suitors, there are reasons that both might not make a run at MCI.

Verizon, which dominates local phone service in the Northeast and midtic, is paying down a hefty debt load while spending billions of dollars to upgrade its copper network with fiber-optic cables and roll out high-speed wireless technology on its cellular network.

In addition, even if the SBC deal makes a quick response necessary, Verizon may not consider MCI as good a fit as Sprint, which in December agreed to merge with wireless rival Nextel Communications Inc.

A purchase of Sprint would bring Verizon a modern, integrated national wireline network and a wireless business that uses the same technology as Verizon Wireless -- all without the reputational baggage and tainted culture that hangs over MCI.

"Whoever buys MCI has to do this whole cleaning-up business, and you have to live with three years of pretty much no capital investment," RHK's Al-Chalabi said.

He noted that MCI is still struggling to integrate all the disparate networks it acquired when it was known as WorldCom -- deals paid for with stock whose value was inflated by financial deceptions.

"Add Qwest to the equation, and you have a bigger integration problem than you had before," he said.

Qwest shares rose 20 cents, or 4.8 percent, to close at $4.40 Thursday on the New York Stock Exchange. MCI shares rose 47 cents, or 2.4 percent, to close at $20.15 on the Nasdaq Stock Market.

The Associated Press contributed to this story.

Source: Gazette, The; Colorado Springs, Colo.

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