Shareholders May Decide MCI’s Fate
The protracted battle for MCI Inc. may now be decided by shareholders.
The long-distance carrier said Wednesday that it rejected Qwest Communications International Inc.’s bid of $8.9 billion, or $27.50 a share, saying it wasn’t “superior” to the $7.5 billion, or $23.10 a share, offered by Verizon Communications Inc.
The decision by MCI’s board of directors was the latest rebuff of Qwest in the two months since the board agreed to be acquired by Verizon, the nation’s largest phone company.
Qwest, the smallest and weakest regional carrier, said that it would “allow shareholders to dictate the next steps,” but stopped short of saying it would launch a hostile takeover.
Last month Qwest hired a consulting firm specializing in proxy fights, seemingly setting the stage for the biggest hostile takeover in the telecom industry since Qwest bought US West for $47 billion in 1998.
“We expect Qwest to begin polling MCI stockholders as ... its next course of action,” analyst David Barden of Banc of America Securities wrote in a note to investors.
Many of MCI’s largest shareholders, such as hedge fund manager John Paulson of Paulson & Co. in New York City, have said they like Qwest’s proposal and are eager to vote on it.
“It’s clearly a superior value, both in the short term and in the long term,” Paulson said.
Qwest still has room to improve its offer, although it reportedly rejected a request from MCI late Tuesday to increase the bid to $30 a share. Verizon, which under previous sale terms had limited MCI’s ability to talk with other suitors, has given the green light to allow talks up until shareholders vote. No date has been set for a vote.
Most Wall Street analysts and researchers said the deal with Verizon was better for MCI shareholders in the long run than the short-term boost in cash they would get from Qwest’s bid. Verizon’s stock market value is $98 billion, more than 12 times that of Qwest.
Joining Verizon, they said, would combine Verizon’s strong local, national and global network with MCI’s big business and government customers.
The combination also would be able to compete better, they said, with the venture being created by SBC Communications Inc.’s pending acquisition of AT&T; Inc., the nation’s largest long-distance carrier.
“Isn’t it a wonderful thing to see this less-than-conventional approach to create long-term value,” said analyst Bryan Van Dusen of the Yankee Group research firm in Boston.
The corporate market is a key asset that both Verizon and MCI want because of its potential growth, Van Dusen said. But Verizon, strong financially and dominant on the East Coast, already is making good strides in that market, he said.
“For Qwest, it really is a fundamental difference between struggling as the smallest Bell company with little room for growth or having a bright future,” Van Dusen said. “That’s why there is such a tension by Qwest. That’s why it will not stop and will consider every alternative available.”
That’s also why, to MCI shareholders such as Paulson, a deal with Qwest makes more sense.
“Combined, the two are stronger than either one is individually,” he said. “And Qwest has far greater ability to create synergies.”
Qwest says it can save $14 billion by combining its national network with MCI’s. Verizon figures it will save about $7 billion.
Both Van Dusen and Paulson note that Verizon will remain strong and continue to grow without MCI. Paulson believes a Qwest-MCI operation would provide another strong national player and more competition.
In turning Qwest down Wednesday, MCI said it questioned the long-term value of Qwest stock, which has been sliding. Qwest’s shares fell 8 cents Wednesday to $3.78 on the New York Stock Exchange.
Paulson said the Verizon deal was “safer” in easing downside risks, but it also had little upside benefits, giving MCI only 5% of the company and little hope of big increases in the stock price. The potential benefits of going with Qwest, on the other hand, would include a 40% stake in the combined company and a lot of room for the stock price to soar.
“There’s significant value in creating [the combination], and that ultimately will be reflected in the stock price,” Paulson said.
One indication of shareholder mood might be trades of big blocks of MCI shares in the coming weeks. The stock gained 38 cents Wednesday to hit a 52-week high of $25.39 on Nasdaq. If shareholders believe the lower Verizon price might hold, they probably will sell quickly, observers said.
Verizon shares gained 15 cents to $35.51 on the NYSE.
