Verizon is likely to raise its offer for MCI over the next month in an effort to outbid Qwest, though just how high it might go is a mystery.
Analysts say the New York- based telecom giant does not have to bid as high as Qwest’s $30-per-share offer to get MCI, because Verizon is a larger and more financially secure company.
“Verizon can and likely will raise its offer,” said Scott Cleland, chief executive of the Precursor Group in Washington, D.C., on Sunday. “It comes down to how much Verizon is willing to pay.”
Verizon will be watching the stock market this week – and waiting for upcoming first-quarter financials from MCI and Qwest – as it plots its next move. A rising MCI share price pressures Verizon to pay more.
Ashburn, Va.-based MCI’s stock price, which closed Friday at $26.69, is closer to Qwest’s offer than to the $23.10-per-share merger agreement that Verizon signed with MCI’s board in late March.
Denver-based Qwest’s bid, which amounts to $9.75 billion, was embraced by the MCI board Saturday, putting Qwest on top for the first time in the 11-week bidding war with Verizon.
If Verizon doesn’t up its bid in the next five days, MCI’s board can officially change its merger recommendation to Qwest.
Even if it loses the recommendation, Verizon still has the right under its existing merger agreement to force a shareholder vote this summer on its proposed merger with MCI. It could then raise its bid and gain the support of MCI’s board just before proxy materials are mailed to MCI shareholders in May.
Verizon also could drop out. It is guaranteed as much as $250 million in breakup fees and expenses and possibly could get more in “walk-away” fees from Qwest. It owns 13.4 percent of MCI, which it could sell to Qwest for $186 million in profits.
“I put 50 percent odds that (Verizon) walks away and pockets the profits,” said Donna Jaegers, of Denver-based Janco Partners. “There’s a lot of other long-distance assets still available besides MCI.”
At the top of the list, experts say, is Sprint, which signed a $35 billion merger agreement last year with Nextel Communications. But Verizon could possibly scuttle the deal with a higher offer.
“The Sprint-Nextel guys are nervous,” said Pat Comack, an independent telecom analyst.
Other options for Verizon include cobbling together a national fiber-optic network from companies such as Global Crossing, WilTel, Douglas County- based Time Warner Telecom or Broomfield-based Level 3.
While Qwest’s finances are stretched to the limit at its $30-per-share offer, some experts believe it could push its bid higher.
Qwest is working to raise another $1.2 billion in cash from investors. Its latest offer included $800 million in cash from large MCI shareholders unhappy with Verizon’s offer and an extra $1 billion in bank financing.
Both Verizon and Qwest want MCI for its lucrative corporate and government clients. Qwest, the weakest of the regional Bell operating companies, has few other growth strategies beyond acquiring MCI.
“This is a critical deal for Qwest, but it’s not a critical deal for Verizon,” said Steve Cohen of Kellner, DiLeo Cohen and Co., a major MCI shareholder. “I am sure (Verizon) has a walk-away price.”
But there may be other factors in the mind of Verizon chief executive Ivan Seidenberg when it comes to winning MCI.
“There’s also an element of ego,” Cleland said. “It’s embarrassing to be outbid by (Qwest). … This would be like the goldfish stealing the shark’s meal.”
Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.
