Verizon slammed Qwest with a surprise punch Saturday, buying out MCI’s largest shareholder, Mexican billionaire Carlos Slim, for $1.1 billion.
The move was a quick counteroffensive to Qwest’s announcement Friday that shareholders holding a majority of MCI stock preferred its bid for MCI over Verizon’s.
“This drives a stake into the heart of Qwest,” said Pat Comack, an analyst with Zachary Investment Research in Miami. “Verizon wants this war to stop now, and they are willing to pay for it.”
Some of MCI’s largest shareholders who supported Qwest on Friday are now on the fence.
“I would have to seriously consider Verizon’s offer,” said Bruce Berkowitz, whose Fairholme Capital Management controls 3.4 percent of MCI. “We’re in an auction, and the next move is Qwest’s.”
Denver-based Qwest isn’t conceding defeat.
Sources close to the company said that it may file a proxy statement for a hostile takeover early this week and that Qwest has the cash, financial backing and willpower to increase its offer to $9.75 billion, or $30 a share.
Qwest said it will continue fighting for MCI, which has more than $5 billion in cash, a national fiber-optic network and a lucrative roster of government and corporate clients.
The battle for MCI has gone back and forth since early February, with Qwest bidding as high as $8.9 billion. But last week, Ashburn, Va.-based MCI spurned a higher Qwest offer for a third time, saying it would merge with industry giant Verizon for $7.5 billion.
Verizon, by taking over Slim’s 13.4 percent stake, becomes MCI’s largest shareholder and removes the biggest wild card in the bidding war for MCI.
Verizon chief executive Ivan Seidenberg hinted at the possibility of offering more money to MCI shareholders in a statement Saturday.
“While this was an opportunity for us to purchase a block of shares under unique circumstances and is an important step forward in our acquisition of MCI, we will continue to assess the situation as we move toward a vote by the MCI shareholders,” he said.
If Verizon buys more stock, it could trigger MCI’s “poison pill” provision, which releases a flood of new stock whenever any single stockholder acquires more than 15 percent of the company. The provision, however, can be voted down by MCI’s board.
New York-based Verizon’s $7.5 billion merger agreement with MCI comes to $23.10 per MCI share in stock and cash.
That is less than the $25.72 in cash per share being paid to Slim, who had criticized Verizon’s bid as insufficient. The deal also allows Slim to benefit if Verizon’s share price rises above $35.52.
Qwest’s $8.9 billion offer amounts to $27.50 per share in cash and stock.
In a statement, Qwest criticized Verizon for creating “two classes of shareholders,” those getting $23.10 a share and Slim. It affirmed its position that its bid remains superior.
Qwest continues its campaign to raise $2 billion in cash from large investors, which could be pumped into a sweetened bid for MCI. Denver financier Philip Anschutz, who controls 16.5 percent of Qwest, said Thursday through a spokesman that he will not participate.
Verizon also will file proxy papers this week for a special MCI shareholder meeting in late June or July to approve its merger with MCI.
But after the Slim deal, experts say Verizon will have to make a similar offer to the hedge funds and sophisticated Wall Street investors that control an estimated 70 percent of MCI.
“The Slim deal buys them (Verizon) a lot of ire from the shareholder community,” said Tim Gilbert, an analyst with Principal Global Investors of Des Moines, Iowa.
Berkowitz said Verizon’s per- share offer to Slim and Qwest’s per-share offer are roughly equivalent, because Slim’s deal allows him to benefit if Verizon’s share price rises.
The deal with Slim also reflects how much Verizon needs MCI to compete with an aggressive SBC Communications, which is gaining regulatory approval for its $16 billion merger with AT&T.
“MCI is a valuable asset,” Berkowitz said. “You could give Verizon $10 billion and five years, and I don’t think they could re-create the enterprise (corporate and government) business that MCI has now.”
Verizon has the resources to win a bidding war, with $4.5 billion in cash and revenues of $71 billion.
Qwest, the smallest of the regional Bell operating companies, has $1.8 billion in cash and revenues of $14 billion. It’s also saddled with $17 billion in debt.
Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com .
