Reuters
Investors Push Qwest Bid for MCI
Wednesday April 6, 6:02 pm ET
By Justin Hyde

WASHINGTON (Reuters) - One of the best-known U.S. money managers, Bill Miller, and some other institutional investors said this week they would vote against MCI's deal with Verizon in favor of a higher $9.1 billion takeover bid from Qwest Communications International Inc.(NYSE:Q - News)

MCI Inc.'s (NasdaqNM:MCIP - News) decision on Wednesday to accept Verizon's $7.6 billion bid, citing Verizon Communications Inc.'s(NYSE:VZ - News) better growth prospects and stronger finances, could push Qwest to pursue a hostile bid. Qwest said on Wednesday it was weighing its next move, and had previously hired a proxy firm.

MCI shares gained 1.5 percent in trading on Wednesday, as investors bet on a hostile move from Qwest or a higher price from Verizon, the largest U.S. telecommunications company.

Bill Miller, chief executive of Legg Mason Capital Management, whose funds own 5.6 million shares of MCI, said in a letter to MCI on Tuesday evening that Qwest's bid was "clearly and significantly superior" to the deal with Verizon.

Miller oversees about $40 billion in assets and his Value Trust fund last year beat the reinvested returns of the Standard & Poor's 500 Index for the 14th straight year. In addition to its MCI holdings, which represent about 1.7 percent of MCI's outstanding shares, Miller's funds are also one of Qwest's largest stockholders with 240 million shares, or about 13 percent of the total.

"If the latest Verizon offer is presented to shareholders for approval, we intend to vote against it," Miller said. "We believe the current shareholders of MCI overwhelmingly prefer the Qwest offer and that it provides superior short and long term value."

Legg Mason Capital Management is a unit of Legg Mason Inc. (NYSE:LM - News).

Hedge fund Elliott Associates, which owns 3.5 percent of MCI, said in a statement it "continues to view the current Qwest offer as superior to the current Verizon proposal, and we intend not to vote for the proposed merger with Verizon as currently structured."

Other large shareholders have backed Qwest's bids, saying the Verizon price was too low. MCI's largest shareholder, Mexican telecommunications magnate Carlos Slim, has said through his spokesman that the offers were approaching a fair price for the company.

But MCI said Verizon's bid offered more certainty of closing, while Qwest's bid was unpopular with its customers. MCI said in a statement that it was also concerned with Qwest's cost-saving assessments and its contingent liabilities.

MCI shares closed up 38 cents at $25.39 in trading on Nasdaq. Miller and several Wall Street analysts said the market has raised a hurdle for Verizon by trading MCI's stock above $23.10 per share -- the value of Verizon's bid minus a dividend MCI paid in March.

If an MCI shareholder believed the Verizon deal was the final word, they could sell immediately and buy more Verizon shares than the deal provides.

"If pro-Verizon MCI holders follow this train of economic logic, the MCI stockholder composition could well shift to favor Qwest the more time that elapses and the more shares trade above the $23.10 level," said Banc of America analyst David Barden.

Lehman Brothers analysts Blake Bath and Andrew Whittaker said Verizon could raise its offer again if it believed its bid would not pass a shareholder vote. About 67 percent of MCI shares were held by institutional investors as of Dec. 31.

"If the shareholder vote were to occur today, we believe that MCI shareholders would reject Verizon's offer," Bath and Whittaker said in a research note.

MCI has a "poison pill" defense against a hostile takeover, but that defense has clauses allowing a bidder to defuse it. Before April 20, a bidder would have to offer $31.25 per MCI share to avoid the poison pill. After that date, the target price would be 25 percent more than MCI's average share price over a ten or 60-day period, whichever was higher.