Verizon says three's a crowd
Telco not interested in deal for Qwest

By Jeff Smith, Rocky Mountain News
Thursday, April 28, 2005

Verizon Communications remained coy Wednesday on whether it will sweeten its bid for MCI Inc. but did say it has no interest in a package deal that includes Qwest Communications.

"Even though we could afford it, the fact is, (Qwest) is a small company that serves very rural states for the most part and has a lot of debt," Verizon Chief Executive Ivan Seidenberg said in response to a question during an all-employee meeting.  "So they're not a strong company as we would understand it.  And so they don't add a lot - or would not add a lot to our business.  So our focus is really - it's on MCI."
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Qwest, in an apparent effort to justify its $30 a share, or $9.75 billion, bid for MCI, projected it will generate $6.5 billion of cost savings and nearly $3 a share in cash flow the first three years after the merger.

Qwest estimated job cuts will range from 8 percent in the telco's long-haul network operation to 35 percent in the combined companies' corporate departments.

MCI last weekend finally declared Qwest's offer superior to Verizon's much lower $23.10 a share, or $7.5 billion, deal.  Verizon has five days to respond, with MCI having until Tuesday to switch its recommendation.

While many expect Verizon to sweeten its offer, others believe the company could decide to walk away with a $240 million break-up fee.

Or Verizon could continue to call for an MCI shareholder vote on its current offer and possibly increase the amount just prior to a vote.

"To be honest, we are looking at all options," Seidenberg told employees.  Employee questions about the nearly three-month takeover battle and Seidenberg's answers were filed with federal regulators.

Seidenberg didn't exactly give MCI a ringing endorsement, perhaps setting the stage for the company to bow out.

He called MCI a "reasonably good asset" with a good customer base that would require some investment.

"We think we will be a very good partner for them," Seidenberg said.  "On the other hand, of course, we've indicated we need to be prudent and smart about what we pay for the asset to make sure we do create value long term."

The Webcast employee meeting came after Verizon reported better-than-expected first-quarter earnings of $1.76 billion.

Meanwhile, Qwest's refined cost-savings estimates are part of presentations being made to Qwest and MCI shareholders, the Denver telco said in a filing with federal regulators Wednesday.

Qwest spokesman Robert Toevs said the company is still estimating total job cuts of between 12,000 and 15,000, or 15 percent to 18 percent of a combined Qwest-MCI work force.

Donna Jaegers, analyst for Janco Partners in Greenwood Village, said Qwest offered a more realistic view of what it can save by merging the companies' long-distance networks.

But she remained skeptical, noting cash flow estimates were based on MCI's fourth-quarter 2004 results, and MCI has projected a 10 percent to 20 percent decline this year.

"I think (Qwest) did this just to give more credibility" to its $30-a-share bid, Jaegers said.

Still, she said, Qwest is overpaying.

"Are they going to cut the right people and still get things to work smoothly?" Jaegers said.  "The best people leave first because they have the options."

And it's not easy, she added, just to turn off one network link and switch the traffic to another.