By Steve Rosenbush and Brian Grow It might seem that the bidding war for telecom pioneer MCI (MCIP) is all but over. On Apr. 9, Verizon (VZ) agreed to purchase a 13% stake in MCI from Mexican investor Carlos Slim Helú. That eliminated a potential ally for Qwest Communications (Q), which is trying to break up Verizon's agreement to acquire MCI. But Verizon is offering Slim more money than it's offering other MCI shareholders. That secured his support but alienated other MCI shareholders who want the same terms.
It would be an extraordinary upset for Qwest to win at this point. However, it appears that CEO Richard Notebaert hasn't given up hope. Qwest has hired consultancy Altman Group to keep track of how many MCI shares would be voted in its favor should it initiate a proxy battle to usurp Verizon. People familiar with the matter say Qwest has enough votes to win a proxy battle, even if Slim sells his shares to Verizon. Qwest declined comment.
INFERIOR CLASS? Many MCI shareholders are willing to go with the Qwest bid because of Verizon's preferential treatment of Slim. Qwest's proposed takeover is valued at $27.50 a share in cash and stock. Verizon is offering Slim $25.72 in cash for each of his 43 million shares and a bonus if Verizon shares rally over the next year. To other MCI shareholders, however, Verizon is offering a combination of stock and cash worth just $23.10.
MCI's board has accepted the lower offer from Verizon because it questions Qwest's stability and long-term value as a partner. And the deal is rolling: On Monday, Verizon and MCI filed merger documents with the Securities & Exchange Commission, a move that begins the countdown to a shareholder vote. No date for the vote has been set. But Qwest refuses to give up and has balked at that evaluation. "By entering into its deal with Mr. Slim, Verizon has both created two classes of shareholders and called into question the MCI board's previous determination that Verizon's lower offer to the other MCI shareholders was superior and fair. We believe Qwest has a superior proposal for all shareholders," Qwest said in a prepared statement.
Verizon's strategy has a limit. The company can't keep buying out additional MCI shareholders because MCI has a poison-pill takeover defense that prevents shareholders from acquiring more than a 15% stake. MCI directors reiterated late on Apr. 11 that the provision won't be dismantled to ease Verizon's acquisition.
KEY COUP. "MCI's board of directors has no intention of amending its rights agreement to permit accumulations of the company's stock in excess of the current 15% limit other than pursuant to its previously announced merger agreement with Verizon or an alternative merger transaction which the board determines is in the best interest of its shareholders," the board said in a statement issued after the market closed on Apr. 11.
For now, Verizon is sitting pretty. And eliminating a financial ally for Qwest may have been a greater coup than notching a big voting stake in MCI. Both Qwest and Verizon were courting Slim, according to sources. By taking the Mexican billionaire out of the picture, "Verizon removed a potential source of funding for Qwest," says Carl Schecter, managing director and head of risk arbitrage at Nomura Securities International in New York City.
What does Qwest do now? It must try to line up additional investors so that it can raise its bid once again. MCI board members indicated last week that they would declare Qwest's offer superior if it raised its bid to $30 a share. Qwest might not be ready to go that high, but it might be willing to take a step or two in that direction.
FIGHT CONTINUES. Even without Qwest raising its bid and despite Verizon's Slim victory, the battle for MCI may end up fought out in the courtroom, some experts believe. Says Schecter: "There's a certain amount of outrage right now. They have the moral high ground. Most of these contested situations seem to end up in the courtroom at some point, if only for tactical reasons. It's another weapon in their arsenal."
Verizon may seem to have the deal nearly wrapped up, but Qwest desperately wants and needs to secure this acquisition. Qwest could improve its financial profile by spreading its considerable debt over a much larger revenue base. And none of Qwest's alternatives, such as buying a smaller long-distance carrier or selling off some of its assets to raise cash, could begin to match the benefits of an MCI deal.
So with its back to the wall, Qwest will keep fighting. And as long as it does so, it could still win. A wounded opponent is often the most dangerous. With Christopher Palmeri in Los Angeles
Rosenbush is a senior writer for BusinessWeek Online in New York, and Grow is a correspondent in BusinessWeek's Atlanta bureau