MCI again spurns Qwest takeover bid
Wednesday, April 06, 2005
MCI's board rejected Qwest's $8.9 billion takeover bid late Tuesday night in favor of a lower bid from Verizon.
The move means Qwest must either abandon its pursuit of the Ashburn, Va.-based long-distance provider or launch a hostile takeover.
"Qwest is weighing its options," said Qwest spokeswoman Claire Mylott. "Shareowners will help dictate the next step in the process."
MCI is expected to call a shareholder vote in June or July to approve a $7.5 billion merger deal it signed with New York-based Verizon last week.
Qwest has hired a proxy solicitation firm and could lobby MCI shareholders to defeat the Verizon deal at that meeting.
"That would force the board's hand," said Donna Jaegers of Denver-based Janco Partners.
A group of MCI's largest shareholders has indicated it would support Qwest in a proxy fight if MCI's board accepted Verizon's lower offer.
"If the latest Verizon offer is presented to shareholders for approval, we intend to vote against it," said Legg Mason Capital Management chief executive Bill Miller in a letter on Tuesday. The company controls nearly 2 percent of MCI stock.
Tuesday night marked the third time that the MCI board has rejected a lower Qwest bid in favor of Verizon, a larger and more financially secure company.
Verizon and Qwest have been battling for MCI, formerly known as WorldCom, which has an international telecommunications network and a rich portfolio of corporate clients. MCI prefers Verizon, which has a lucrative wireless business and a market value of $99 billion. Qwest is worth $7 billion and has $17 billion in debt.
Denver-based Qwest's bid was $27.50 per share, about half stock and half cash. Verizon's $23.10-per-share offer was 20 percent lower and only about a third cash.
At least one investment bank, Credit Suisse First Boston, concluded Tuesday that Qwest's bid was "superior" to that of Verizon.
A number of experts, however, have said that Qwest could not afford to win its $8.9 billion bid for MCI.
Qwest's offer is more than five times the value of MCI's earnings before income taxes, interest, depreciation and amortization, or EBITDA. That's a perilously high amount for a company with $17 billion in debt, said independent telecom consultant Tom Friedberg.
In comparison, SBC has agreed to pay less than four times the same measure of cash flow for AT&T, a bigger and stronger company than MCI.
"If they win this, they have overpaid," Friedberg said of Qwest. "Qwest is effectively getting itself deeper into debt."
James Cramer, a business columnist with TheStreet.com, attacked Qwest's bid in a recent column that was written as a memo to Verizon CEO Ivan Seidenberg.
"Let them pay $28 smackers per share. They don't have the money. In two years, Qwest will be bankrupt after that acquisition and you'll be able to buy both for the price of one," he wrote.
Cramer and others have called Qwest, which is struggling to compete against much larger telecommunications providers, desperate to make a deal.
Qwest said it expects to spend $2.7 billion to upgrade and merge MCI's billing and network systems with its own. It plans to consolidate as many as 70 different MCI systems to gain about $2.9 billion in annual cost savings. Part of the savings would come from layoffs estimated at 12,000 to 15,000 workers.
MCI, the nation's second-largest long-distance carrier, grew through a series of acquisitions that left it with a patchwork of fiber networks, billing and other systems.
Some expect the task of consolidation to be harder, and more costly, than Qwest has predicted.
"The magnitude ... appears challenging," Credit Suisse First Boston analyst Ido Cohen said in a recent research note.
Cohen and his fellow CSFB researchers also suggest that many of MCI's customers might be reluctant to have their data and voice traffic moved to another network.
Verizon has offered different cost-savings from an MCI merger: $1.2 billion annually. Verizon's estimate on integration investment is about the same as Qwest's at $3 billion.
But Verizon predicts it will have to integrate more than 100 systems, which is more than Qwest has suggested.