Qwest adds another $500 million cash to its offer for MCI

By Jeff Smith, Rocky Mountain News
March 18, 2005

Qwest Communications, as expected, upped its bid to buy MCI Inc. by nearly $500 million in cash to $8.45 billion, and Chief Executive Dick Notebaert said there should be no doubt now that Qwest's offer is better than Verizon's.

"It would be very difficult to understand how they (MCI) could say anything but yes," Notebaert said in an interview Thursday morning after the offer was announced. "No matter how I look at this transaction, it is far superior for the MCI share owners - and the board represents its share owners."

Qwest's newest offer, which is worth $26 a share, or about $1.7 billion more than the value of MCI's agreement with Verizon Communications, was presented by Notebaert to MCI's board Wednesday night. MCI, formerly known as WorldCom, said it would respond by March 28.

Some analysts say Verizon must increase its $6.75 billion transaction if it wants to be assured of getting MCI.

"I think Verizon will come back with a bid of $27 to $28 a share and put it away," said Patrick Comack, a telecommunications analyst for Zachary Investment Research in Miami. "I believe they need to knock Qwest out. I don't think they can afford to play games anymore."

Fairholme Capital Management's Bruce Berkowitz, whose company owns about 11 million shares of MCI, is displeased with Verizon's offer. But he doesn't think the newest bid by Qwest is enough either.

"The Qwest offer is low, quite frankly," Berkowitz said. "Verizon could pay $30 a share, and three years from now, they'll be joking about what an unbelievable bargain they got," he said. "If I think MCI is worth a lot more than its price, should I just sit back and take it?"

If Verizon waits for MCI's decision and MCI agrees to go with Qwest, Verizon would have five days to counter. The Verizon-MCI agreement calls for MCI's board to make a determination of whether any rival bid is "superior."

For its part, Verizon said Thursday its view about Qwest's proposals "could not be clearer" and that the company believes its current agreement with MCI represents a "fair" value for MCI shareholders, employees, customers and creditors.

"Qwest's most recent bid does nothing to address the fundamental concerns we have identified, while increasing the amount of cash to be paid out to shareholders exacerbates the risks," Verizon spokesman Eric Rabe said.

On Wednesday, Verizon gave a scathing assessment of Qwest's financial condition and the Denver telecommunications company's projections of $14.8 billion in savings from a potential Qwest-MCI merger.

"There appears to be a desperate quality to Qwest's efforts to acquire MCI," Verizon Chief Executive Ivan Seidenberg wrote in a letter to MCI. "Qwest fails to explain the financial alchemy required to keep Qwest afloat, complete the acquisition of MCI and invest in the business."

Todd Rosenbluth, an analyst with Standard & Poor's, also wrote Thursday that he believes Qwest "lacks the cash flow generation to be bidding against itself."

This is Qwest's fourth offer in about six weeks and the second since MCI announced in mid-February its decision to go with Verizon. Like the previous offer, the bid guarantees the value of the transaction as long as Qwest shares don't slip significantly.

Notebaert said he gave a presentation to the MCI board that included 20 or so slides detailing why a Qwest acquisition would be superior and talked about why a Verizon-MCI combination would raise market concentration concerns in the land-line market.

Notebaert added that while people can debate the exact amount of merger cost savings, the "salient point" is that Qwest's offer is 25 percent higher than Verizon's, with 75 percent more cash.

Since MCI shareholders would own 40 percent of the combined company, they would, in effect, be getting 40 cents on the dollar of post-merger cost savings or synergies, he said.

Much of the savings, though, would be generated by cutting 12,000 to 15,000 jobs from the combined company's 80,000-employee work force.

Notebaert also said Qwest's current debt load of $17 billion "is not germane to the discussion." MCI doesn't have much debt after going through bankruptcy reorganization, and the argument is that the combined company, after job cuts, will have enough cash flow to comfortably handle its debt.

The fact that Qwest has junk-bond-rated debt now might be a "nice adjective" for detractors such as Verizon to use, but a merged Qwest-MCI will have investment-grade credit ratings within three years, he maintained.

Notebaert declined to say whether Qwest could raise its bid even higher if necessary, or would take an offer directly to MCI shareholders if it is spurned by MCI's board.

In a recent letter to MCI's board, Qwest said MCI lawyers have acknowledged that a Qwest-MCI deal could pass regulatory muster faster than a Verizon merger.

Seidenberg disputed market dominance concerns in congressional testimony this month, noting there is a new communications era marked by competing technologies such as wireless and Internet-based telephone calling, and emerging competitors such as system integrators and equipment makers.


Raising the bid

Feb. 3: Qwest reportedly bid $6.3 billion.

Feb. 11: Offer increased to $8 billion in cash and stock.

Feb. 24: Revised $8 billion offer that accelerates the cash payments and better protects the value of the deal if Qwest's stock price slides

Thursday (presented to MCI board Wednesday): $8.45 billion