Qwest submitted a retooled $8 billion bid for MCI on Thursday in an attempt to steal the long-distance carrier from Verizon’s grasp.
The cash and stock offer provides more cash up front than Qwest’s first bid, as well as protection for MCI shareholders should Qwest’s stock price drop before the deal closes.
Qwest is showing spunk with its continued pursuit of MCI, but analysts generally agree the game is industry giant Verizon’s to lose. The MCI board accepted Verizon’s $6.75 billion cash and stock offer Feb. 13.
“Qwest is kind of a cornered animal, and they’re going to do anything they can because this is a battle for corporate survival,” said independent telecommunications consultant Tom Friedberg.
If Denver-based Qwest could grab MCI, it would get access to MCI’s lucrative corporate and government customers, as well as gain a much broader national presence. MCI’s $5.6 billion in cash on hand also would help Qwest pay down its debt.
Qwest is the runt of the regional Bell phone companies, with a market value less than one-tenth the size of Verizon’s. Its service territory is spread out over 14 mostly rural Western states, it is saddled with debt of more than $17 billion and it doesn’t own a wireless service.
In a letter to MCI shareholders accompanying the new bid, Qwest chief executive Richard Notebaert said Qwest’s offer was likely to be approved more quickly by regulators than the Verizon bid. He also said credit ratio and cash flow improvements from a combined Qwest-MCI would create “synergies” that would boost the company’s shareholder value.
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Qwest’s first $8 billion offer for MCI on Feb. 11 was rejected by MCI’s board in favor of Verizon. The board’s rationale was that New York-based Verizon was a far stronger company.
MCI’s board will consider the new offer, said MCI spokesman Peter Lucht.
If MCI were to take Qwest’s offer, it would have to pay a $200 million breakup fee to Verizon.
Verizon spokesman Eric Rabe said the company has an agreement with MCI and a record of adding value when combining with other companies.
Verizon, which plans to invest $3.5 billion in MCI’s network if it makes the acquisition, is studying Qwest’s bid, said a source close to Verizon.
Qwest’s offer increases pressure on Verizon to boost its bid.
“If Verizon wants this, they have to increase their bid to within spitting distance of Qwest’s,” said Janco Partners analyst Donna Jaegers.
She said that would allow MCI’s board to say that the Verizon offer may be slightly less than Qwest’s but that Verizon’s stock value is more stable over time.
A number of large MCI shareowners complained Verizon’s offer was too low and encouraged another Qwest bid.
“It is without a doubt an improved offer, and we feel that it is worth more than the prior offer and more than Verizon’s,” said Richard Hunter, director of research, at Lighthouse Capital Management, which holds 274,000 MCI shares.
There were few surprises in the Qwest bid, which analysts had expected to be a restructured version of the earlier offer. It includes a $6 dividend to be paid as soon as possible after the offer is approved by MCI shareholders, $3.10 in cash on the deal’s completion, and $15.50 per share in Qwest stock.
Qwest made the offer in a letter addressed to the MCI board that is rife with complaints about the board’s earlier treatment of its spurned suitor.
“MCI has failed to provide meaningful guidance or direction in response to the Qwest proposal,” the letter from Notebaert says. “Consequently, with only press reports and lawsuits as sources of information for how the MCI Board evaluated the components of our proposal, Qwest tenders this revised proposal.”
Several analysts recently have painted an MCI-Qwest pairing as Qwest’s last chance to survive in the brutally competitive telecommunications market.
But Qwest’s management and board don’t accept that argument. They believe the company will have other opportunities if the MCI deal falls through, said a source close to the company. The source said, however, board members fear that if that perception gains acceptance it could have a negative effect on Qwest’s business.
“Now that such public attention has been brought to the issue, there is more at stake,” the source said.
Analysts say Verizon, which has a $98 billion market value, holds the superior hand and can easily win a bidding war.
“I think Verizon will win this deal. I think egos are involved now, and I don’t think (Verizon CEO) Ivan Seidenberg’s ego will allow him to lose,” said telecommunications analyst Pat Comack, of Zachary Investment Research.
Qwest stock closed Thursday at $4.20, up 15 cents. MCI shares were up 26 cents to $23.21. Verizon stock fell 5 cents to $35.50.
Staff writer Tom McGhee can be reached at 303-820-1671 or tmcghee@denverpost.com.
