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APRIL 25, 2005
By Brian Grow Round Three Goes to Qwest In its battle to take MCI from Verizon, the never-give-in telecom finally gets an O.K. Is this the end? Maybe not Qwest International's dogged pursuit of MCI (MCIP ) may finally be paying off. On Apr. 23, the board of the nation's second-largest long-distance company declared Qwest's (Q ) $30-per-share offer to be superior to a lower one that it had already accepted from rival bidder Verizon Communications (VZ ). The MCI board's assent sets the stage for another round of dueling deals between the telecom suitors, and it puts pressure on Verizon to up its $23.10-per-share offer -- or walk away. Two days earlier, Qwest announced its latest offer for MCI and demanded an answer from the target's board by 5 p.m. on Saturday, Apr. 23. After being rebuffed on two earlier bids, Qwest execs finally received a yes. The latest offer includes $16 per share in cash, worth about $5.2 billion, and the rest in Qwest stock. The ailing telecom, which has found it difficult to win over the MCI board with wads of cash and stock for shareholders, also added $800 million in equity backing from at least four large investors, a move designed to ease concerns about Qwest's shaky share price, which closed at $3.55 at the end of trading on Apr. 22. And Qwest improved protections in its financial agreements to prevent lenders from backing out. Verizon's bid includes $8.35 in cash and the remainder in shares. In total, Qwest is offering $9.75 billion, while Verizon's deal is valued at $7.6 billion -- a 28% gap. "GRATIFIED." That 28% spread finally swayed a board with whom executives at Denver-based Qwest have feuded bitterly in recent weeks. The MCI directors twice rejected Qwest offers in favor of lower Verizon bids, arguing that Qwest's stock will plunge once an acquisition is announced, dropping the deal's real value. They also worry that lenders will walk away if MCI customers fail to renew contracts because they're concerned about Qwest taking over. Verizon Chief Executive Ivan Seidenberg added insult by declaring Qwest's promise of huge cost-savings in a combination with MCI to be "modern fiction." The rejections and accusations left Qwest Chief Executive Richard D. Notebaert red-faced, but with little choice but to persevere. His tenacity seems to have paid off. "Qwest is gratified that MCI has recognized its superior offer for MCI," Notebaert's company said in a statement. Despite Qwest's new offer, Verizon retains the upper hand in this nasty squabble, say some analysts. It has five days to decide whether to increase its offer. It could stick with its current hand in this high-stakes game because the race toward a shareholder vote on its already-approved offer started two weeks ago, after the companies filed merger-related documents with the Securities & Exchange Commission. What's more, Verizon, not MCI, has the right to terminate the current merger agreement and collect a $240 million breakup fee. WHAT'S GOOD FOR SLIM. Those still-strong cards likely mean no sudden moves from Verizon. "In light of the change in this process, we will consider all of our options and determine how best to serve Verizon shareholders," Verizon said in a statement released Saturday. Nonetheless, its bid is looking more and more precarious. A host of MCI shareholders, including three of the largest five, in recent weeks have declared Verizon's offer too low and vowed to vote against the deal. In fact, Qwest says results of its proxy analysis show more than 50% of shareholders support its bid. Investor anger was fanned two weeks ago when Verizon bought a 13.4% stake in MCI from its largest shareholder, Mexican billionaire Carlos Slim Helu for $25.72, or $2.50 per share more than it has offered other shareholders (see BW, 4/12/05, "Slim Sale Is a Blow for Qwest"). The side deal created two tiers of shareholders, and it means Verizon will almost certainly have to pay other owners at least the same price it gave Slim. Investors owning at least 13% of MCI have declared their allegiance to Qwest, and more are expected to speak out now. "We are pleased that MCI Board did the right thing and declared the Qwest offer superior," Elliott Associates, a hedge fund that owns 2.7 million MCI shares, said in a statement on Sunday, Apr. 24. "It is time for Verizon to match the Qwest offer or walk away next week and not hold the entire process hostage by forcing a vote on their current offer that has no chance of approval. We continue to consider Qwest's new offer better than the offer Verizon has made for the Slim shares." HIGH-STAKES AUCTION. For Verizon to boost its bid won't be a problem. With a market capitalization of $94.3 billion, compared to Qwest's $6.45 billion, Verizon can easily pay more. But it will have to mollify MCI shareholders who are unlikely to accept anything less than $30 per share. More important, perhaps, is Verizon's own willingness to cough up more cash. The current bidding war started after SBC Communications (SBC ) acquired AT&T Communications in January in a deal worth $16 billion. After Verizon's Seidenberg declared he didn't need to acquire a company such as MCI to jump-start Verizon's push into long-distance and other services for big corporate customers, he launched a surprise, $6.8 billion bid for MCI. But Qwest -- with $17.3 billion in debt and little to lose -- wouldn't quit. Two months and three rounds of bidding later, Seidenberg is faced with a high-stakes auction that will force him to pay at least $1.5 billion more than the original bid, say analysts. Paying remaining investors the same share price given to Slim puts MCI's price tag at $8.34 billion. BETTER MATCH? Still, don't count out Verizon quite yet. While the MCI board declared Qwest's bid superior, it has yet to throw its full weight behind the deal. In a statement, MCI said its board has until May 3 "to change its current recommendation in favor of the MCI/Verizon merger agreement." In the interim, the MCI board will maintain its recommendation to go with Verizon. Sources close to MCI's board indicate that a substantial number of MCI directors, as well as Chief Executive Michael D. Capellas, strongly back a merger with Verizon, a company most analysts agree is more stable financially and a better match strategically for MCI. That means Verizon may not have to meet Qwest's $30-per-share offer to win the board, if not the shareholders, back to its side. For now, the MCI board has breathed new life into Qwest's acquisition hopes. If this tussle goes to Round 4, Verizon will have to muster more cash -- and plenty more grit.  Grow is a correspondent in BusinessWeek's Atlanta bureau
BW MALL
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