Qwest waits it out
Rival Verizon has until Friday to sweeten bid

By Jeff Smith, Rocky Mountain News
Monday, April 25, 2005

Now the agonizing wait begins for Qwest Communications.

Has the Denver telco delivered a knockout punch with a $30-a-share, $9.75 billion bid that MCI Inc. finally agreed is superior?

Or will Verizon Communications, which has a $23.10-a-share offer on the table, counter?

MCI, after previously spurning Qwest three times in the now nearly three-month takeover battle, on Saturday declared Qwest's "best and final" offer better than a $7.5 billion deal with Verizon.

But Verizon has five days to respond and could decide to take longer than that.  And analysts think MCI again is just using Qwest to get more money from Verizon.

The most likely scenario, an analyst said Sunday, is that New York-based Verizon will respond with a sweetened bid of its own by Friday.

"There's no turning back now (for Verizon)," predicted Patrick Comack, a telecommunications analyst with his own firm, Zachary Investment Research, in Miami.

Verizon, Comack said, may only need to offer roughly what it has agreed to pay MCI's largest shareowner, Carlos Slim Helu.  Verizon said it would pay the Mexican billionaire $25.72 a share, or an estimated $27 a share when counting future guarantees.

"I don't think Verizon ever thought it could get away paying the others (MCI stockholders) less than Slim, it's just that Qwest is now rushing them; $26 a share could be a close vote, $27 should do it," Comack said.

A Verizon counter of $27 a share also would slash the current spread between Qwest's and Verizon's offers from 30 percent to 11 percent.

Then the takeover battle should be over, Comack said, unless Qwest really wasn't serious last week when it said $30 a share was its "best and final" offer.  Some analysts believe Qwest has gone as high at it can.

But others think there is a chance Verizon will decide MCI has gotten too expensive, and that it is better to abandon the pursuit, pocket a $240 million break-up fee, and wait for another day.

Verizon also would stand to receive up to a $185 million profit, representing the difference between what the company is paying for Slim's 43 million shares and Qwest's $30-a-share offer.

Many analysts said they believe Qwest and Verizon already are overpaying for MCI, a long-distance carrier with lucrative corporate and government customers but whose revenues are projected to decline by 10 percent to 14 percent this year.

Verizon's stock has slipped 5 percent since merger talks were reported in February, and the company might decide to spend its money elsewhere, or go after Sprint instead or Qwest down the road.  It wasn't long ago that Verizon was expressing interest in acquiring the remaining 45 percent Vodaphone stake in Verizon Wireless.

Donna Jaegers, a telecommunications analyst with Janco Partners in Greenwood Village, said Friday she could see Verizon Chief Executive Ivan Seidenberg backing out of the MCI deal out of a show of financial discipline.

But others wonder if Seidenberg, chief executive of a company with a market value of nearly $100 billion, is willing to swallow his pride and lose out to a much smaller Qwest, which has a market value of less than $7 billion.

Although the takeover battle only became public 11 weeks ago, both companies have been courting MCI since last summer.

MCI represents the most extensive long-distance network still up for grabs, after SBC Communications struck a deal to buy AT&T.

Another possibility is that Verizon would exercise its right to require MCI shareholders to vote on its $23.10-a-share offer anyway.

Under that scenario, Verizon could increase its offer just before a shareholder vote this summer, or hope it could persuade enough shareholders of the wisdom of going with the more financially stable Verizon at a lower price.

Comack noted the MCI board likely would be exasperated if Verizon delays its response like that.

In Saturday's statement, Verizon discussed its options - including possibly ending its agreement with MCI - in terms of "how best to serve Verizon shareholders."

It might be wishful thinking, but sources close to Qwest pointed to Verizon's statement Saturday as possibly preparing its stockholders for a retreat from MCI.

Verizon previously had talked about taking the "necessary steps" to secure MCI shareholder approval for its pending transaction.

For its part, Qwest said it was "gratified" by MCI's decision, and expected MCI to "build upon its declaration of superiority with specific acts of support, including expeditiously seeking regulatory approvals of a transaction that it considers superior and in the best interests of its shareowners."

Nelson Phelps, executive director of the Association of U S West Retirees, on Sunday praised Qwest Chief Executive Richard Notebaert for being "very gutsy and very professional" in his pursuit of MCI.

"I still think it's very important for Qwest to wrap up this deal from a standpoint of survival with the big boys and to be able to compete in the telecommunications market," Phelps said.

But while Phelps was encouraged by MCI's possible reversal of merger partners, he also was realistic.

"I'd be very surprised if Verizon doesn't come back," Phelps said.

And if Verizon does counter with a hard punch, Phelps and others said they don't know if Qwest has anything left.

What MCI represents to suitors

  Qwest needs MCI because the Denver telco - the smallest regional Bell company - lacks a wireless network and needs MCI's corporate customers and global network to compete in an industry that's rapidly consolidating.  Because it's saddled with $17 billion in debt, it's difficult for Qwest to find acquisitions that are affordable and appropriate.

Qwest already has a state-of-the-art long-distance network, so it essentially could move MCI's traffic onto its network and eliminate duplications in the two backbones.

  Verizon needs MCI so it can better compete against its chief rival, SBC Communications, which plans to acquire AT&T.  By combining forces, AT&T and SBC would create a global telecommunications giant.  A Verizon- MCI merger would be much the same.

Verizon has the financial capacity to buy both MCI and Qwest, but it could walk away this time, collect a $240 million breakup fee and $10 million in legal fees - then buy the combined MCI-Qwest later.