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Archive for Thursday, March 3, 2005

Verizon approves MCI’s request to study Qwest bid

Potential for bidding war emerges in latest round of merger discussions

March 3, 2005

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— A potential bidding war for MCI Inc. took shape Wednesday as merger partner Verizon Communications Inc. freed the long-distance telephone company to discuss a higher bid from Qwest Communications Inc. -- which welcomed the decision, but sent a prickly response.

The plot twist came the same day as congressional hearings in which all the CEOs involved in a recent spate of big telecom mergers testified about how those deals might affect customers and competition.

MCI set a two-week time frame for talks and a full evaluation of the revised $8 billion bid submitted last week by Qwest, the local phone company for most of the Rocky Mountains and Pacific Northwest. That offer is $1.2 billion richer than the price agreed to Feb. 14 by Verizon, which dominates the Northeast and Mid-Atlantic.

In response to MCI, Qwest questioned MCI's sincerity and rejected assertions by MCI on Tuesday and Wednesday that it had given Qwest the same access to internal documents as Verizon.

"We question whether our (first) proposal truly received an extensive review," Qwest CEO Richard Notebaert wrote in a letter to MCI Chairman Nicholas Katzenbach, noting that MCI had given Qwest access to only 4,000 key documents just two days before the Verizon deal was announced. "We are also concerned that the process over the next two weeks will simply be process for process sake, as opposed to a meaningful evaluation of our offer."

The exchange came a day after Denver-based Qwest impressed MCI investors with plans to generate more cost savings by cutting up to 15,000 jobs -- twice as many as planned by Verizon.

Verizon declined to say whether it might boost its offer should MCI decide the Qwest deal is now compelling.

"We believe that this process will result in MCI reaching the same conclusion that it reached after seven months of discussions with Qwest," the company said in a statement.

Qwest signaled Tuesday that it would consider boosting its offer further, but only if MCI agreed to meet first.

Should MCI use the rival bids to start an auction, "the risk they run there is that Verizon walks," a person familiar with Verizon's plans said under condition of anonymity. Verizon "is interested in getting MCI at the right price, and they've done a lot of work to figure out what that price ought to be."

Verizon's bid currently is worth about $20.80 for each MCI share, consisting of $6 cash and the rest in Verizon stock, for a total of $6.8 billion.

Qwest is offering $24.60, including 50 percent more cash than Verizon, but the stock portion of the payment is viewed as riskier because Qwest is in far weaker financial shape and faces more severe strategic obstacles than Verizon.

Still, investors appeared optimistic about a potential bidding war and a larger payoff for MCI, which is based in Ashburn, Va.

With SBC Communications Inc. set to acquire AT&T Corp. in a $16 billion deal announced in late January, analysts don't see other real options for Verizon and Qwest if they hope to be competitive in the business services market dominated by AT&T and MCI.

MCI's shares rose 9 cents to close at $23.45 in Wednesday's trading on the Nasdaq Stock Market. That represents a gain of nearly 30 percent since mid-January, when merger speculation took hold with word of the impending SBC-AT&T deal. Qwest shares fell 12 cents to close at $3.93 on the New York Stock Exchange, while Verizon shares rose 22 cents to $36.47.

"Qwest has gone from not being a very credible bidder to one where people are taking a more serious look," said Steven M. Cohen, chief investment officer for Kellner DiLeo Cohen & Co., a New York-based hedge fund which bought MCI shares when the merger speculation began and still owns shares. Since hedge funds generally target short-term gains, that continuing stake suggests the firm expects MCI's shares to rise further.

In terms of long-term shareholders, "Qwest has gone out and made a better case that this deal makes sense and would result in a completely remade Qwest, and they've convinced a lot of the investment community that Qwest deserves a new look if they complete this merger," Cohen said.

The debate over the perceived merits of the competing offers also continued to percolate around the question of whether one deal or the other might encounter more objections from government officials about lost competition. Much if the discussion has focused on the business communications market, where there already are few providers with the reach to serve companies with national and global operations.

Verizon has argued in recent days that a Qwest-MCI merger would hurt the public interest by combining two operators of national data and voice networks. Because Verizon doesn't have a national network, its purchase of MCI would strengthen a competitor in that market rather than eliminating one, the company has said.

Qwest has countered that because Verizon and MCI's operations overlap heavily in the eastern part of the nation, their merger would create a company with too much market share and clout.

"MCI and Verizon have complementary assets and capabilities," Verizon Chief Executive Ivan Seidenberg said Wednesday in his prepared remarks before the House Committee on Energy and Commerce. "Verizon has strong local assets and a solid presence among local and regional customers. MCI has strong (data) networks and products and a solid base of national and global customers."

The hearing also featured testimony from top executives of Sprint Corp. and Nextel Communications Inc., companies that agreed to a $35 billion merger in December.

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