Subject:  MCI accepts Verizon’s $7.6-billion bid |
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Date Posted: 10:44:49 03/29/05 Tue
MCI accepts Verizon’s $7.6-billion bid
Verizon wins MCI with a beefed-up offer, leaving Qwest out in the cold after a bruising, six-week bidding war.
March 29, 2005
MCI accepted a sweetened takeover offer of $7.6 billion from Verizon Communications on Tuesday, spurning Qwest’s higher offer of $8.45 billion.
Verizon hiked its cash-and-stock offer to $23.50 per share, up from the $20.75 per share, or $6.75 billion, that Verizon originally agreed to pay when the companies stuck a deal in mid-February. In addition to adding more cash, the bid includes protection against a decline in its stock price.
"MCI's board has been closely and carefully evaluating all of the recent developments," said MCI Chairman Nicholas Katzenbach. "We believe Verizon's substantial increase in its offer, the strength of its competitive position, and the financial certainty at close make this offer compelling to our shareholders, customers, and employees."
MCI shareholders will receive at least 0.4062 shares of Verizon for each share of MCI. The deal also includes $2.75 per share in cash plus $5.60 in special cash dividends, not including a $0.40 dividend recently paid by MCI to its shareholders.
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Shares of MCI, the second largest long-distance carrier, slipped $0.24 to $27.10 in recent trading, while shares of Verizon, the nation's largest telecom services provider, rose $0.69 to $35.41.
“Verizon and MCI together create a formidable and highly competitive company delivering a full range of mission-critical voice and data products to business and government,” said Verizon Chairman and CEO Ivan Seidenberg. “We believe our agreement with MCI represents superior value and is a compelling proposition for MCI’s shareholders, customers, employees and creditors.”
Qwest disagreed. “We respect the right of Verizon to change the composition and value of their bid, but we still believe our proposal creates superior value for shareowners,” said Qwest spokesperson Claire Mylott. “We are going to assess the situation and determine what is in the best interests of shareowners, customers, and employees.”
Shares of Qwest Communications, the nation's fourth-largest local phone outfit, rose $0.08 cents to $3.83.
Consolidation within the telecommunications field has accelerated over the last few years as rising competition has pushed regional phone companies and long-distance carriers to cut costs and find new customers. As cable companies try to woo residential customers, and disruptive technologies like VoIP challenge traditional phone service, regional carriers find themselves in a defensive position.
The Good Fight
Over the past six weeks Qwest has fought a vigorous battle. Tuesday’s decision came a day after Qwest set an April 5 deadline for its raised offer in yet-another letter delivered to MCI and filed with the Securities and Exchange Commission.
Now that Verizon and MCI have settled down to a happy union, the fate of Qwest, often called the runt of the Bells, is in limbo. The company carries a $17.3-billion debt and has a shaky financial history that has led to charges by the Securities and Exchange Commission against the former CEO and several former executives.
Qwest also lacks a wireless arm, a significant disadvantage since the traditional wireline industry is declining and carriers are looking at wireless as key industry growth. “They are certainly not participants in the growth markets,” said Robert Rosenberg, president of research firm Insight Research.
Mr. Rosenberg doesn’t count Qwest out for the count though. “If you look at VoIP and naked DSL, they’ve been innovative where they can. I wouldn’t paint the picture completely black.” He adds, “It’s a tough environment, even for Mr. Seidenberg (Verizon’s CEO) sitting in the cat’s perch on top of Verizon.”
Though MCI announced on Valentine’s Day it planned to merge with Verizon, Qwest and Verizon have been battling it out through press releases and sharply worded letters ever since.
Mr. Seidenberg claimed in one letter to MCI executives that Qwest’s last-ditch bidding had a “desperate quality.” He said a merger with Qwest would be “perilous” for the long-distance company. He pointed to Qwest’s $17.3 billion of “junk” debt and other liabilities, concluding there are “dim” prospects for the company’s growth. “Qwest’s claims do not pass a common-sense test,” he said in the letter, which was addressed to Mr. Katzenbach and CEO Michael Capellas. A copy was filed with the SEC.
Qwest CEO Richard Notebaert responded by saying it was “unfortunate that some in the process” would deprive MCI shareholders of the company’s true value. “Let fairness, economics, and the best interests of the shareholders decide this matter,” he said.
All this came earlier this month, a day after Qwest’s former CEO Joseph Nacchio, along with several former Qwest executives, were charged with “massive financial fraud” by the SEC.
Verizon Valentine
On February 14, the Verizon deal—which then included $4.8 billion in stock, $488 million in cash, and $1.46 billion in dividends to be paid by MCI to shareholders—looked likely to go through without a protracted bidding war. Most analysts acknowledged the combination made more strategic sense than the Qwest offer, particularly given uncertainty about the strength of Qwest’s stock and rising threats of competition from SBC/AT&T, Sprint/Nextel and cable companies.
Qwest, however, wouldn’t give up. It restructured its bid, particularly to address the risk that Qwest shares might drop substantially in value before the transaction could close. Qwest compared the offers openly at an analyst meeting, insisting its offer would result in a “superior deal, superior combination.” As it currently stands, the Qwest bid would have protected MCI shareholders against an up to 10 percent drop in Qwest’s share price, based on $4.15 per share.
Qwest said it would pay MCI shareholders an effective value of $24.60 per share. That compared favorably with Verizon’s prior offer of $20.75 per share. The Qwest bid would have been $15.50 in stock for each MCI share and $9.10 in cash, $3.10 paid when the deal is approved and the rest in other dividend payments. Verizon’s earlier offer worked out to $14.42 in stock, $1.50 in cash, and $4.50 in MCI dividends.
Qwest has also maintained it could generate cost reductions of $14.8 billion from a merger with MCI and cut 15,000 jobs—about 17 percent of the combined company’s work force. It also promised its EBITDA margin, based on earnings before taxes, depreciation and amortization, would rise from 23 percent in the first year of the merger to 29 percent in the third.
Verizon has argued a purchase by Qwest could harm U.S. government and business interests and result in less investment in MCI’s network. Verizon said it will spend less than the $3 billion Verizon has earmarked for MCI’s network, which counts the United States’ Department of Defense and the Department of Homeland Security among its customers.
Hurdles Ahead
Now that Verizon and MCI are officially on the acquisition path, two more hurdles remain.
The union needs to get approval by the Federal Communications Commission. The acquisition will be the third major merger among big telecom companies in as many months. The Verizon/Quest deal follows closely on the heels of SBC’s announced plans to acquire AT&T and Sprint’s proposal to acquire Nextel.
Analysts agree that the telecom mergers are not likely to raise regulatory flags, given the current environment favoring light regulation at the FCC.
The union could also face a MCI-shareholder lawsuit. Shareholder lawsuits have become increasingly common place over the past few years, and since Qwest’s offer was over 10 percent higher than Verizon’s, disgruntled MCI shareholders might turn to the courts.
http://www.redherring.com/Article.aspx?a=11623&hed=MCI+accepts+Verizon%E2%80%99s+%247.6-billion+bid§or=Industries&subsector=Communications
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