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MCI & Verizon: Together again
Qwest drops out of bidding after MCI picks new $8.4B Verizon offer over Qwest's $9.9B bid.
May 2, 2005: 3:05 PM EDT

NEW YORK (CNN/Money) - The 11 week battle for MCI apparently ended Monday after its board returned to the previously preferred bidder, Verizon Communications, prompting Qwest Communications to drop out of the bidding for the long distance provider.

MCI (Research) announced Monday that it was recommending an improved offer from Verizon (Research) rather than the higher-priced offer from Qwest that it had previously recommended.

In its response, Qwest (Research) again criticized the MCI board, accusing it of being "more interested in bending to Verizon's will than serving its shareholders."

"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," said the statement from the spurned bidder. "We pursued MCI with tenacity and discipline and feel strongly that our bid would have brought far more value to MCI shareholders. Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value."

Verizon's new offer is worth at least $26 per MCI share, in the form of $5.60 in cash and the higher of either 0.5743 Verizon share, or the amount of Verizon shares needed to deliver an additional $20.40. Verizon is also allowed to use cash to supplement its offer, instead of issuing additional shares, as part of this price-protection feature.

As of Friday's close, the new Verizon offer would be worth $26.16, or about $8.4 billion based on MCI's shares outstanding.

Qwest had offered $30 a share of MCI, in a bid that had briefly won favor of the MCI board. The Qwest offer included $16 a share in cash, and was valued at $9.9 billion.

"While MCI shareholders benefit from a 'floor' of $20.40, they also benefit from the upside potential of an increase in Verizon's stock price," said a statement from MCI recommending the new offer.

Verizon's new offer is up from its previous offer of $23.10 a share, plus a 40 cent a share dividend from MCI. It also tops the $25.72 it agreed to pay Mexican investor Carlos Slim Helu for a 13.7 percent stake in MCI last month. That purchase prompted widespread objections from MCI's other shareholders.

MCI's statement said that a number of its large business customers had expressed a preference for the company to be bought by Verizon rather than Qwest, and that a number of customers have requested rights to terminate their MCI contract in the event of a purchase by Qwest during current negotiations.

"These customer concerns, in the board's view, pose risks in connection with a Qwest transaction," said MCI's statement.

The New York Times and Wall Street Journal reported Monday that Verizon had demanded that MCI disclose that customer preference as part of its offer, an effort to convince MCI shareholders that its bid would be superior.

The Qwest statement questioned the validity of those customer concerns.

"We do note that the declaration of 'superiority' for our $30 offer contained no discussion of the factors the MCI board now describes as reasons $30 is not deemed greater than $26." It went on to say that MCI never contacted Qwest about the new offer.

MCI had recommended Verizon's offer for the company three previous times beforeturning to Qwest on April 23, in the wake of the outcry over Verizon's deal with Slim.

Shares of Dow component Verizon were off about 3 percent in mid-afternoon trading in New York, while shares of MCI lost about 4 percent. Meanwhile Qwest shares were marginally higher.

Qwest still wants Verizon-MCI deal blocked

While Qwest was dropping its bid for MCI, it signaled it would still try to disrupt the Verizon-MCI combination. It had previously said it would urge the Federal Communications Commission to block a proposed purchase of AT&T (Research) by SBC Communications (Research), and it said Monday it would seek the same sort of regulatory intervention in the Verizon-MCI deal.

"To better protect the interests of customers, the market requires multiple, robust competitors committed to ensuring that innovation and value remain inherent in America's telecommunications marketplace," said Qwest's statement. "These issues will need to be addressed during the regulatory approval process for the Verizon/MCI and SBC/AT&T mergers."

But telecom analyst Greg Gorbatenko of Marquis Investment Research said he believes this new Verizon offer is essentially a done deal. He said it answers MCI shareholders' concerns about Slim getting preferential treatment.

Gorbatenko said Qwest didn't have the financing, financial wherewithal or credibility to raise what it said was its final offer. And he said the statement about possible loss of business should convince Verizon critics among MCI shareholders to accept the Verizon deal.

Gorbatenko said it made little sense for Qwest to bother to launch a proxy fight to win support for its offer from MCI shareholders. He said he thought the company would now look elsewhere for a deal to grow and that there's also a chance it could now be acquired by another telecom.

But he believes the immediate outlook for Qwest's stock is not good, despite the fact that it was little changed in Monday trading.

"I would not want to be a Qwest shareholder this morning," he said. "If they raise the bid, they'll get slammed. If they don't get MCI, they'll get slammed."

Gorbatenko has a "sell" recommendation on Qwest, a "hold" recommendation on MCI and a "buy" recommendation on Verizon. He does not own shares in any of the companies.

When MCI announced it was recommending Qwest, it had given Verizon until April 29 to improve its offer. But the weekend passed without any announcement of an improved Verizon offer from either MCI or Verizon.

For stock information and recent coverage of MCI, click here.  Top of page


MCI Inc.
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