Qwest chief executive Richard Notebaert signaled his intention to mount a bidding war for MCI, informing the MCI board Thursday that Qwest will submit a new bid to wrest it from Verizon.
A new formal offer from Qwest would constitute a hostile takeover attempt, said analyst Pat Comack of Zachary Investment Research in Miami. “This is a formal letter informing them that they are going hostile.”
Janco Partners analyst Donna Jaegers agreed that a formal offer would be hostile.
Notebaert outlined his position in a letter to MCI that was filed with the Securities and Exchange Commission. MCI on Sunday accepted a $6.75 billion offer from Verizon, rejecting a higher $8 billion Qwest bid.
“We would like to advise you that once we have completed our review of the Verizon merger agreement, we do intend to submit a modified offer to acquire MCI, and we would expect MCI and its advisers to engage us in a meaningful dialogue regarding the merits of our offer, and we would further expect access to due diligence information consistent with that offered other parties,” Notebaert wrote.
He complained that MCI has never responded to Qwest about the terms of Qwest’s offer made Feb. 11. Notebaert’s letter also said MCI did not give Qwest the same access to its books it gave Verizon.
Shares of long-distance provider MCI, based in Ashburn, Va., jumped as much as 4.5 percent in extended trading. It was at $21.49 a share in after-hours trading, up 83 cents or about 4 percent.
MCI official Carolyn Tyler and Verizon spokesman Eric Rabe declined to comment.
“This puts more pressure on Verizon. Obviously Qwest isn’t going to go away,” Comack said. “They are in a bidding war.”
Large MCI shareholders, including John Paulson, whose Paulson & Co., owns 3.4 percent of MCI’s stock, have called for Qwest to submit a new offer.
“Qwest is doing the right thing. They informed the board that they would like to be treated fairly in this process,” Paulson said.
Leon Cooperman, whose Omega Advisors holds about 3 percent of MCI’s stock, said that if Qwest does make another offer, the MCI board will have to negotiate.
“Then it will be up to Verizon to see if they want to bump their bid to stay competitive.”
A bidding war would be in shareholders’ interest, regardless of the winner.
“Momentum is certainly shifting back toward Qwest,” said Tim Gilbert, a fixed-income analyst at Des Moines, Iowa-based Principal Global Investors LLC, which oversees $125 billion in assets, including Qwest bonds.
MCI CEO Michael Capellas has said that MCI’s board believes New York-based Verizon’s bid is stronger because it’s the nation’s largest telecom company and has the best potential for growth.
A source said that in conversations with shareholders, Capellas said he was concerned about Qwest’s debt, its limited prospects for growth and unresolved shareholder lawsuits sparked by an accounting scandal under former CEO Joe Nacchio.
Denver-based Qwest, the smallest of the regional Bell operating companies, has $17.2 billion in debt, no wireless division and serves a predominantly rural territory spanning 14 states.
But with Qwest as a mate, MCI shareholders would own 40 percent of the combined company and reap an equivalent percentage of cost savings and other synergies, Notebaert wrote.
Since MCI would make up only about 6 percent of a combined Verizon-MCI, the savings to MCI shareholders would be smaller, Qwest says.
An acquisition of MCI, which has more than $5 billion cash on hand, could help Qwest better manage its debt, analysts have said.
Verizon has a market capitalization of about $100 billion, more than 14 times that of Qwest, which is unlikely to win a bidding war with Verizon.
However, should Qwest succeed in its bid, MCI would have to pay a $200 million breakup fee to Verizon.
Qwest spokesman Tyler Gronbach said Notebaert wouldn’t have sent the letter unless he believed that Qwest has a good chance to acquire MCI.
As for the break-up fee, “We will cross that bridge when we come to it,” he said.Qwest stock was up 4 cents to $3.88 in after-hours trading. Verizon was unchanged after hours at $35.68, down 44 cents for the day.
Bloomberg News contributed to this report.
Staff writer Tom McGhee can be reached at 303-820-1671 or tmcghee@denverpost.com
