MCI Again Favors Bid From Verizon

Times Staff Writer

For a second time, MCI Inc. on Tuesday agreed to a buyout offer from Verizon Communications Inc., which had upped its bid by nearly $1 billion to fend off a rival.

But many expect the battle for ownership of the nation’s No. 2 long-distance carrier to continue.

The enhanced buyout proposal from Verizon still falls $800 million short of the offer from smaller phone company Qwest Communications International Inc., setting the stage for a potential hostile bid.


MCI shares gained 84 cents to $23.78 on Nasdaq, slightly higher than Verizon’s offering price, as investors anticipated a continued bidding war.

The decision came after Verizon sweetened its cash-and-stock offer on Monday to $23.50 a share, or $7.64 billion, from $6.75 billion. Verizon agreed to raise the cash portion of the bid to $8.75 a share, up from $6, and offered protections for MCI shareholders in case Verizon’s stock slides.

Despite weeks of aggressive overtures from Qwest, a Denver-based regional carrier, MCI executives said they ultimately felt more comfortable selling the company to the larger Verizon, which they said was more likely to prosper.

“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,” said MCI Chairman Nicholas Katzenbach.

But Qwest doesn’t appear willing to give up, analysts said. Qwest Chief Executive Richard Notebaert has campaigned ferociously to stay in the running. “We still believe our proposal creates superior value for shareowners,” company executives said in a statement, but they did not say what their next step might be.

Some shareholders agree and plan to lobby MCI to change its mind about Qwest -- or seek more money from Verizon.

“The Verizon increase was definitely a step in the right direction, but it did not trump the Qwest bid,” said Bruce Berkowitz, president of Fairholme Capital Management, a Short Hills, N.J., firm that owns 3.5% of MCI’s shares.

Verizon is the nation’s largest local phone company, though its position is threatened by SBC Communications Inc.'s pending $16-billion acquisition of AT&T; Corp.

Verizon would be a much stronger partner than Qwest in competing with the retooled SBC, said analyst Kate Gerwig of Current Analysis Inc., a Sterling, Va., telecom consulting firm. “Pairing MCI with Verizon is the best combination for both of the businesses,” she said.

Berkowitz and other investors say Qwest would be as good a partner, if not better.

MCI, the Ashburn, Va.-based company that was formerly WorldCom Inc., last month chose a $6.8-billion offer from Verizon over Qwest’s $7.3-billion offer. Qwest then increased its offer to $8.45 billion, or $26 a share, and MCI reopened negotiations with the smaller bidder. On Monday, Qwest said it had lined up more financing, but it threatened to pull its offer if MCI didn’t respond by midnight April 5.

The MCI board considered the Qwest offer and a revised bid from Verizon, then announced Tuesday that it had chosen Verizon once again. The new agreement raised the break-up fee if MCI pulls out to $240 million, from $200 million, along with up to $10 million in reimbursements.

Qwest shares gained 4 cents to $3.79, while Verizon rose 14 cents to $34.86. Both trade on the New York Stock Exchange.

The deal still faces many hurdles, including getting approval from regulators and shareholders.

Verizon “gained the upper hand” in winning MCI’s support, two Lehman Bros. analysts wrote in a report to clients. But they expect Qwest to sweeten its offer once again and -- if unsuccessful -- launch a hostile bid.

“At this point, Qwest has two options -- it can either withdraw its proposal or formally launch a hostile offer for MCI. We believe the current [Qwest] offer retains the support of [MCI] shareholders,” analysts Blake Bath and Andrew Whittaker wrote.

The title of their report: “Far From Over.”