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Small Investors Object to Verizon's Sweetheart Deal With Major MCI Shareholder

Posted on: Tuesday, 12 April 2005, 09:00 CDT

Apr. 12--Several MCI Corp. shareholders were incensed Monday at the side deal cut by Verizon Communications Inc. to buy a huge block of MCI stock from Mexican telecom tycoon Carlos Slim.

"It's just a punch in the gut for small investors," said Larry Lai, a Chicago investor who owns 2,400 shares of MCI. "People are flabbergasted by this."

Over the weekend, Verizon said it would pay Slim $25.72 a share for his 43.4 million shares of MCI, giving Verizon more than 13 percent of MCI stock.

Last week, MCI's board accepted Verizon's renewed offer to buy the long-distance carrier for $23.50 a share--almost 20 percent below a counteroffer from Qwest Communications International Inc.

Wall Street also thinks MCI's shares are worth more than Verizon is offering. The stock edged 17 cents higher on Monday to close at $26.01.

Lai has organized an online petition drive aimed at pressuring MCI's board to negotiate more money from Verizon before closing the deal. If the current deal is submitted to MCI shareholders for approval without enhancement, Lai said he and many others will vote against it.

"We don't explicitly favor the Qwest proposal," Lai said, "but we think that Verizon's offer is insufficient."

Larger MCI shareholders have also expressed displeasure over Verizon's deal with Slim. William Miller, chief executive of Legg Mason Funds Management, and Leon Copperman, chairman of Omega Advisors, sent letters to Michael Capellas, MCI's chief executive, complaining that Slim shouldn't be paid more for his shares than others.

The deal between Slim and Verizon is a private transaction but "it clearly puts pressure on MCI's board from other shareholders to increase the purchase price," said Michael Nemeroff, a Chicago lawyer with Vedder Price.

By controlling the largest block of stock in MCI, Verizon has taken a big step toward quashing the hopes of Richard Notebaert, the persistent Qwest CEO who keeps refusing to take no for an answer, Nemeroff said.

"My guess is that the MCI board is in heavy negotiations with Verizon to get more money to save its face," he said.

No matter what happens, there are certain to be lawsuits filed, Nemeroff said.

"MCI shareholders may argue that the board failed to get maximum value for the shareholders," he said. "They could point to the price Verizon paid to Slim to support that argument."

A poll of MCI shareholders commissioned by Qwest last week found that a majority believe Qwest's offer is superior to Verizon's. A Qwest spokesman said that poll didn't include the block of shares Slim owns.

"Slim is a smart guy who got a nice return on his investment," said Ben Silverman, a telecom analyst for the investment newsletter FindProfit.com. "Now it's up to Verizon to make the other investors happy, too.

"At this point, they have to."

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MCIP, VZ, Q,

Source: Chicago Tribune

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