Qwest refines bid to buy MCI
Revised offer keeps price near $8 billion but speeds payments
By Jeff Smith, Rocky Mountain News

Friday, February 25, 2005

Qwest Communications on Thursday launched a revised bid for MCI Inc. that keeps the price at nearly $8 billion but would accelerate cash payments to MCI stockholders and better protect the deal's value.

Some analysts believe Qwest's modified offer will put pressure on New York-based Verizon Communications to boost its $6.74 billion transaction or risk losing MCI to Qwest.

"Given the public disclosure of Qwest's bid, we believe MCI shareholders will expect Verizon to sweeten its own bid by $1 billion to $1.5 billion," wrote Jeffrey Halpern, a telecommunications analyst with Sanford C. Bernstein in New York.

Others disagreed.

"It's a pretty modest modification (by Qwest); it's basically the terms that MCI already has rejected," said Scott Cleland, chief executive of the Precursor Group, an independent research firm. "Verizon is not quaking in its boots."

For its part, Virginia-based MCI said in a statement that "MCI's board will conduct a thorough review of the Qwest offer, as it has with all previous offers."

Said Verizon spokesman Bob Varettoni, in a statement repeated by other company representatives: "Verizon has a signed agreement with MCI and a proven track record of completing transactions that create value for shareholders, customers and employees." Varettoni declined to elaborate.

MCI would have to pay a $200 million fee if it decides to break up its agreement with Verizon.

In a letter to MCI's board of directors, Qwest Chief Executive Dick Notebaert characterized the Denver telecommunications company's revised offer as "even more compelling" for MCI stockholders than previous offers.

"Qwest believes this revised proposal is superior to the Verizon transaction because it delivers greater value in cash and stock per MCI share," Notebaert wrote.

He also said a combined Qwest-MCI would generate "synergy value," or cost savings equal to $18 per MCI share, and that a deal with Qwest would receive "more favorable regulatory certainty and speed."

Qwest noted in a regulatory filing that MCI stockholders would own about 40 percent of the combined company vs. only 5 percent of a Verizon-MCI.

Notebaert also repeated previous claims that Qwest earlier had been denied the same access as Verizon to legal, financial and operational information.

Qwest privately has griped that it had a chance to look at MCI's books for only one day before MCI announced it had decided to go with Verizon.

Jeffrey Kagan, an independent telecommunications consultant in Atlanta, said acting hastily, perhaps, has been MCI's biggest mistake.

While it was understandable that MCI, recovering from its own accounting scandal, wanted to go with the bigger and more stable Verizon, Kagan said he thinks MCI Chief Executive Michael Capellas "jumped too quickly. Verizon still might end up with MCI, but it all happened too quickly."

Kagan noted Capellas has taken a lot of heat from MCI shareholders who "obviously want more, and you can't blame them."

Analysts have said they don't think Verizon likes the idea of getting into a bidding war with Qwest.

"If Verizon were to increase the price, it's not going to be unlimited," Kagan said. "I don't see either deal being wrong. There's going to be a lot of mergers the next couple of years."

This week, Broomfield-based Level 3 Communications also better positioned itself to be an acquirer or takeover target.

Many analysts believe Verizon ultimately will get MCI and that MCI shareholders are using Qwest to get more money from Verizon.

But Blake Bath, a telecommunications analyst with Lehman Brothers in New York, gave 10 reasons Wednesday why Verizon might walk away from the MCI deal.

The reasons listed by Bath included that Verizon would grow faster without MCI, is only interested in a small portion of MCI's business service revenue and that the profitability of MCI's "good revenue" is questionable.

Analysts have said Verizon would prefer to focus on its growing wireless business but was compelled to look at MCI after SBC announced earlier this year that it would acquire AT&T for $16 billion. AT&T and MCI represent two of only a few long-distance networks still up for grabs.

And then there's the breakup fee.

"Verizon would be paid $200 million to walk away," Bath wrote, noting the amount is roughly equal to 40 percent of the investment Verizon is expected to make in its wireless data network this year.

What they're saying

"I don't know how (MCI) can ignore the Qwest bid now. Placing a collar on the bid had to address MCI's primary concern."

- Tim Ghriskey, chief investment officer of Solaris Asset Management

"What MCI shareholders want is a better bid from Verizon. Now that Verizon is in the game, I suspect they're going to finish what they started."

- Daniel Zito, Legg Mason Wood Walker Inc. analyst

"You would think that if any company should be sensitive to the needs of shareholders, it's MCI."

- Christopher Matlock, chief investment officer for Lighthouse Capital Management in Houston, which owns about $200,000 worth of MCI stock

"I think it's as expected. By giving shareholders more money upfront, (Qwest) might sway some of these hedge funds."

- Donna Jaegers, research analyst at Janco Partners

"Verizon has a signed agreement with MCI and (has) a proven track record of completing transactions that create value for shareholders, customers and employees."

- Eric Rabe, Verizon spokesman

By the numbers

Qwest's revised $8 billion bid for MCI accelerates the payout of cash to MCI stockholders and installs a mechanism to protect the value of the deal for investors in case Qwest shares fall. The details:

$9.10 a share in cash, with $6 a share to be paid as a special dividend "as soon as practicable" following MCI stockholder approval of the deal. Under the previous offer, the cash would have been paid between the signing of the agreement and the closing of the deal.

$15.50 a share in stock.

Value of the deal is protected as long as Qwest shares trade between $3.74 and $4.57.

Pros and cons

Pros

Bid is $1 billion higher than Verizon offer and includes $1 billion more in cash.

Cost savings of the merged company are expected to be higher than a Verizon-MCI deal because Qwest and MCI have overlapping long-distance networks.

Cons

Qwest is weaker and much smaller than Verizon. The Denver telco has $17 billion of debt.

Unlike Verizon, Qwest doesn't have its own wireless operation.

Qwest faces unresolved shareholder liabilities stemming from its accounting scandal.

smithje@RockyMountainNews.com or 303-892-5155