Qwest’s board is unlikely to increase its bid for MCI but is evaluating shareholder support for a hostile takeover bid, sources close to the situation said.
Qwest’s board met by telephone Wednesday morning after MCI’s board rejected Qwest for the third time in two months in favor of a substantially lower offer from Verizon.
In a phone call late Tuesday night, Qwest chief executive Richard Notebaert refused a request from MCI to increase its bid from $8.9 billion to $9.75 billion, the sources confirmed.
Qwest’s proxy solicitation firm, The Altman Group, will continue calling MCI shareholders through this week to determine how many shares they own and whether they support the Qwest bid.
Once the research is gathered, Qwest has several options for a hostile takeover:
Mount a proxy battle to end run MCI’s board and lobby MCI shareholders to vote down the $7.5 billion Verizon-MCI merger at a special meeting in June or July.
Undertake a “consent solicitation,” where MCI shareholders replace MCI’s board with a slate of pro-Qwest directors. It could be done by mail, according to MCI’s shareholder-friendly bylaws and could take four to six weeks.
Make an “exchange offer,” or buy shares directly from MCI’s shareholders in exchange for cash and Qwest stock. But this is unlikely because MCI shareholders would have to wait a year or more as the Qwest-MCI deal seeks regulatory approval.
Denver-based Qwest needs support from shareholders controlling at least 51 percent of MCI stock to succeed in any of these scenarios.
Shareholders holding about 27 percent of MCI’s stock oppose the Verizon merger – and half of those shareholders say they would support Qwest in a proxy battle. MCI’s executives and directors, who support the Verizon deal, hold only 1 percent of MCI’s shares. No large MCI shareholder has come out publicly in favor of the Verizon merger.
“If the shareholder vote were to occur today, we believe that MCI shareholders would reject Verizon’s offer supporting the higher proposal from Qwest,” concluded Lehman Brothers analysts Blake Bath and Andrew Whittaker in a research note Wednesday.
New York-based Verizon may have to increase its offer now, analysts say.
“Qwest likely goes hostile, and as the vote on the MCI-Verizon deal approaches, we think it’s likely Verizon will increase its offer,” Bath said in a phone interview Wednesday.
Another key factor in swaying shareholder opinion is the performance of Qwest and Verizon stock, experts say. Both companies’ offers include stock, and MCI shareholders pocket the increase if the stock value rises.
Verizon is proceeding with its merger with Ashburn, Va.-based MCI and is expected to file proxy papers in days.
“We are pleased to see the process move to the next step where we can begin the proxy phase of this transaction,” said Verizon spokesman Peter Thonis.
Qwest also may file proxy papers regarding its hostile intentions in the next week or two, sources said.
In a statement Tuesday night, Qwest alluded to taking its case to shareholders of MCI: “The company is currently weighing its options, and shareholders will dictate the next steps in this process.”
MCI listed its reasons for rejecting Qwest’s bid Wednesday: “negative sentiment” from MCI customers; Qwest’s shareholder lawsuits relating to $2.5 billion in overstated sales; and concern about Qwest’s cost-savings estimates.
Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.
