Qwest revises bid for MCI by adding share-value protection

Sandy Shore

Friday, Feb. 25, 2005 | 9:21 a.m.

DENVER -- MCI Inc. stood by its $6.7 billion deal today to merge with Verizon Communications Inc. despite an improved $8 billion bid to acquire the long-distance telephone company submitted a day earlier by Qwest Communications International Inc.

"We will do our utmost to drive (the Verizon deal) through. We entered into it. We believe in it," MCI chief executive Michael Capellas said during a conference call after the company's fourth-quarter earnings report.

"At the same time," Capellas stressed, "we'll do our fiduciary duty" to fully evaluate Qwest's latest offer.

Denver-based Qwest modified its offer for MCI on Thursday by adding a mechanism to guarantee the value of the stock portion of the bid, setting the stage for another round in its competition with Verizon.

Qwest also offered a faster cash payout to shareholders but did not increase the $8 billion value of the bid, according to a Securities and Exchange Commission filing on Thursday.

"It is in the best interests of MCI stockholders for MCI to engage with Qwest immediately in meaningful discussions regarding Qwest's improved, revised proposal," Qwest Chief Executive Dick Notebaert wrote in a letter to the MCI board of directors.

In this morning's stock trading, Qwest's shares slid 19 cents, or 4.5 percent, to $4.01 on the New York Stock Exchange. MCI shares fell 30 cents to $22.51 on the Nasdaq Stock Market, while Verizon's shares rose 43 cents, or 1.2 percent, to $35.93 on the NYSE.

On Thursday, MCI issued a statement saying its board "will conduct a thorough review of the Qwest offer, as it has with all previous offers" -- a comment likely directed at charges by some MCI investors that management failed shareholders by not securing a better price once a higher bid was on the table.

In a separate statement, Verizon spokesman Eric Rabe said, "Verizon has a signed agreement with MCI and (has) a proven track record of completing transactions that create value for shareholders, customers and employees."

The new bid comes as some key MCI shareholders have put pressure on the company, which last week accepted a $6.7 billion offer from Verizon over Qwest's initial $8 billion. At least one shareholder, hedge fund manager Elliott Associates, has said it would vote against the Verizon-MCI merger, saying Qwest's initial offer was superior.

Analysts have said Verizon, the dominant local phone company in the Northeast and a top cellular player, likely won MCI's favor because it is larger and in better financial shape than Qwest -- making payment in Verizon's stock a less risky proposition.

Qwest, the local phone carrier in 14 Western and Midwestern states and owner of a national fiber-optic network, is weighed down by more than $16.7 billion in long-term debt, a weak wireless division and competition from cable and high-speed data companies.

In its initial bid, Qwest offered $24.60 a share to MCI shareholders, comprised of $7.50 a share in cash, $1.60 a share in special dividends and $15.50 of Qwest common stock based on a fixed exchange ratio of 3.735 Qwest shares per MCI share and Qwest's recent share price of about $4.15.

The new offer guarantees the stock portion of the deal will hold at $15.50 per share by adjusting the amount of Qwest stock paid if the shares fall below $4.15 per share.

The revised bid also changes the schedule of cash payments to MCI shareholders from four quarterly dividends of 40 cents and a closing payment of $7.50 to a $6 per share one-time payment upon shareholder approval and a closing payment of $3.10 a share.

"I think it's as expected," research analyst Donna Jaegers of Janco Partners said of the modified bid. "By giving shareholders more money upfront they might sway some of these hedge funds."

She also speculated that the revised Qwest bid might lead to another offer from Verizon. "It's not over by any means."

The Verizon offer currently values each MCI share at $20.55, or a total of $6.68 billion. That's nearly $100 million less than when MCI agreed to the buyout, because Verizon's shares have fallen.

Should MCI choose to go with Qwest, it must pay Verizon a $200 million breakup fee.

Meanwhile today, MCI said it swung to a loss of $32 million in the fourth quarter of 2004, but reported an operating profit. Its revenue fell and it forecast more declines in 2005.