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MCI, Qwest to Talk Again

Posted on: Saturday, 2 April 2005, 15:00 CST

NEW YORK -- MCI Inc. invited Qwest to reopen merger talks Friday, just three days after the long-distance phone company agreed to a sweetened $7.5 billion buyout from Verizon and a day after Qwest raised its bid to nearly $9 billion.

Qwest Communications International Inc. dismissed the gesture as disingenuous and reiterated an April 5 deadline for MCI to accept or reject its offer. The Denver-based company noted that when MCI agreed to the new Verizon deal on Tuesday, it notified Qwest that there was no need for additional discussions.

"Therefore, it is questionable what additional information the MCI Board would require at this time," Qwest said in a prepared statement. The news release also criticized MCI for agreeing to new provisions in the Verizon deal that handcuff MCI's ability to terminate that contract in favor of a superior proposal. "We urge the MCI Board to cease its favoritism . . . and run a fair, transparent, complete and timely sales process."

MCI's stock rose for a fourth straight session on Friday -- to a level nearly 10 percent higher than the price Verizon has agreed to pay -- as investors again speculated that either Verizon will be forced to boost its bid again or that Qwest might pull off an upset in the two-month tussle.

But rather than bidding higher, Verizon could try to halt the bidding by triggering a provision in its agreement with MCI that would require a straight vote by MCI shareholders on the current deal.

In that scenario, Verizon would be betting that longer-term MCI investors are too concerned about Qwest's financial frailty and whether the Qwest's shares they'd receive as payment would hold their value. Much of the pressure on MCI's board to accept Qwest's offer has come from hedge funds and other short-term investors who'd likely dump their Qwest shares soon after receiving them.

"We may ask for a vote at some point and have that right under our agreement of (March 29), but have not yet. No comment on whether we will," Verizon spokesman Eric Rabe said by e-mail.

There's also an element of pride and potential embarrassment at play as Verizon plots its strategy. While it can easily afford to outbid Qwest, Verizon would hate to pay a price which assigns a higher relative value to MCI's business compared with what SBC Communications Inc. is paying to acquire AT&T Corp.

Both MCI and AT&T are ailing financially, losing customers and revenues to rivals who offer not only long-distance calls but local, wireless and Internet services.

But MCI's business is in worse shape due to the huge scandal when the company was still known as WorldCom Inc. and its ensuing bankruptcy.

In terms of overall price tag, the $16 billion SBC is paying for AT&T is still about twice as much as the latest offers for MCI.

But investment analysts at UBS Investment Research and Citigroup Smith Barney noted this week that Verizon's new agreement already values MCI's estimated future earnings more richly than AT&T's.

"While we believe the economics of the bid are relatively easy to justify given the level of synergies predicted by the company, (Verizon) management may begin worrying about the optics of paying well in excess of the (valuation) SBC paid for AT&T," John Hodulik of UBS wrote Friday in a research update.

The new Qwest Communications International Inc. offer submitted Thursday values MCI at $27.50 per share, or $8.94 billion, in cash and Qwest stock. The Verizon deal, which replaced a $6.75 billion agreement reached in mid-February, values MCI at $23.10 per share in cash and stock.

MCI's board has repeatedly expressed a preference for partnering with Verizon, twice rejecting higher-priced bids from Qwest out of concern about that company's weak financial health and poor business prospects.

Shares of MCI rose 39 cents to close at $25.29 in Friday trading on the Nasdaq Stock Market. Verizon shares fell 31 cents to close at $35.19 on the New York Stock Exchange, while Qwest shares slipped 6 cents to close at $3.64 on the NYSE.

The jousting between Verizon and Qwest, the biggest telecom takeover battle since the height of the Internet bubble, was set off by AT&T's late-January agreement to be acquired by SBC.

MCI has far less debt than Qwest, but, like AT&T, is steadily losing revenues and customers with the collapse of long-distance calling as a viable stand-alone business.

Both MCI and AT&T, however, retain valuable assets with their millions of customers -- especially high-paying businesses -- as well as national fiber-optic networks.

The new deal with Verizon calls for payment of 0.4062 share of Verizon stock and $8.35 in cash for each share of MCI. The cash payment represents an increase of $2.35 from the first Verizon deal. The stock component is unchanged, although Verizon has agreed to boost that part if, by the time the deal closes, Verizon stock remains below $36.31 per share -- the price at which 0.4062 share equals $14.75.

Qwest's $27.50 bid, up from its prior offer of $26, consists of $13.50 per share in cash and $14 worth of its stock. Earlier this week, the company hired a proxy consulting firm, a sign it may seek a direct vote by MCI shareowners on its latest offer if it is rejected by MCI's board.

Source: Deseret News (Salt Lake City)

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