Verizon Adjusts Its Offer for MCI
As Qwest Stokes Bidding Battle
By ALMAR LATOUR and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
February 14, 2005
The battle to acquire MCI Inc. heated up a notch further over the weekend as Verizon Communications Inc. adjusted aspects of its original $6.3 billion offer after Qwest Communications International Inc. raised its cash and stock bid to about $7.3 billion, according to people close to the situation.
Board members of MCI were briefed yesterday on both bids, these people said. Verizon board members were on standby for a board vote, if required.
Amid a flurry of telecom deals, the fight over MCI has grown particularly intense because it's the No. 2 U.S. long-distance company, with 14 million residential and more than a million coveted corporate customers -- and one of the last companies left unattached in the recent rush to consolidate. Just two weeks ago, SBC Communications Inc. agreed to acquire AT&T Corp. for $16 billion, while Sprint Corp. agreed to buy Nextel Communications Inc. for $35 billion in December.
The latest offer from Denver-based Qwest, the local phone company in 14 Western states, adds complexity to the decisions facing MCI's board, which will now have to weigh a higher offer from Qwest, a struggling company with a market value of $7.5 billion, against possibly a lower offer from Verizon, the country's largest local phone company, with a market value of more than $100 billion and about 55 million phone lines throughout the heavily populated Northeast.
Qwest's offer comes in at about $23 a share, while Verizon's original bid stood at about $20, though it could have been increased. MCI's shares closed Friday at $20.75, up 29 cents, on the Nasdaq Stock Market, as investors anticipated a heated contest over one of the last pieces of major telecom real estate.
It remains unclear which aspects of its offer Verizon has adjusted. People close to the situation say Verizon is unlikely to engage in a protracted bidding war.
Some MCI executives are leaning toward a bid by Verizon, even if it is lower, because Verizon is much stronger financially than Qwest. Verizon has established itself as a clear survivor of the telecom battles, as the nation's largest phone company and majority owner of Verizon Wireless, the second-largest wireless company.
Corporate boards have significant discretion to take a buyout offer lower than others being considered. But when they do, they typically must justify their choice, and often they do so citing such things as regulatory-approval concerns, financing risks, or the prospects of the combined company, especially in stock-for-stock deals. That said, if the difference in price is substantial, the board's decision is likely to be subject to highly critical review from shareholders and potentially the courts.
The purchase of MCI would mark the end of the nation's independent long-distance industry. MCI, long before it was acquired by WorldCom Inc. in 1998, was credited with bringing the first competition to the telecom industry and the original AT&T phone monopoly by setting up a network of microwave towers to transmit calls.
[David and Goliath]
Large U.S. telecom companies looked at MCI as a takeover target for years. A onetime stock-market star, it boasted a peak value of more than $180 billion in June 1998. Verizon first inquired about a takeover in 2001, and SBC and BellSouth Corp. also each looked closely at the long-distance company.
WorldCom collapsed into bankruptcy in 2002 after disclosing the largest accounting fraud in U.S. history. It re-emerged renamed as MCI, and it still faces some ghosts from its past. It has to settle outstanding tax payments with several state governments. And its former chief executive officer, Bernard Ebbers, is on trial on charges of conspiracy and securities fraud related to WorldCom's accounting scandal.
Today, with a market capitalization of roughly $6.6 billion, MCI is deemed too small to remain independent.
Verizon, based in New York and the nation's largest local phone company, wants to acquire MCI because it would speed up for Verizon the growth of corporate business, for decades the domain of companies like MCI and AT&T with their long-distance networks. Verizon has been building new networks for data and voice calls and is assembling its own sales force.
If it could get MCI, based in Ashburn, Va., at the right price, Verizon could save some of its expansion costs and use MCI's networks and sales force instead. Moreover, MCI has large customers such as the U.S. government in Washington and corporations in New York -- both in Verizon's local phone territory -- and it wants to keep them in the fold, as well as sell them more services.
For debt-laden Qwest, which launched its latest offer late Friday night, acquiring MCI could mean an improved financial situation. Qwest's debt load is more than $17 billion, while MCI has a debt load of about $5 billion -- giving a combined company with less debt in proportion to revenues, earnings or market capitalization than Qwest has today.
A combined Qwest-MCI entity would also create one of the largest telecom companies serving large corporate customers. Qwest executives hope that such a vehicle could eventually be a takeover target for other telecom companies in need of such business.
Headed by Michael Capellas, the former chief executive of Compaq Computer Corp., MCI emerged from bankruptcy protection last year. Since then, Mr. Capellas appears to have successfully lined up potential buyers -- and now, even competing bids.
[Michael Capellas]
The fate of the nation's long-distance companies has been bleak since losing a set of regulatory rulings last year that make it more expensive for them to offer local phone service -- especially because they have to compete with giants like Verizon and SBC that offer everything from local phone to wireless to video services.
But MCI still offers some attractive assets, particularly its one million business customers, including at least $1 billion in lucrative contracts with the federal government and its network. MCI also has 14 million residential customers. The acquisition of MCI would catapult Verizon to the No. 2 spot in corporate business, after AT&T.
Verizon's latest courtship of MCI started last fall, several months after MCI's emergence from bankruptcy protection in April. Just 18 months ago, Verizon and MCI were still at loggerheads: Verizon complained that MCI, in the wake of its fraud, was a "criminal enterprise." The hard feelings have now been assuaged.
A move by Verizon to buy MCI would mark the sole acquisition of a company since the creation of Verizon with the $60 billion GTE-Bell Atlantic merger in 2000.
Facing declining revenues from its traditional local phone business, Verizon has been investing heavily in wireless services and rolling out fiber networks to deliver TV and help it compete more aggressively against cable companies.
About 40% of Verizon's $70 billion in revenues comes from its wireless operations, when fully consolidated. Vodafone Group PLC of the U.K. is Verizon's partner in Verizon Wireless and owns 45% of the entity.
Verizon sees cable companies as its main rivals and has been rolling out a fiber network, in which it invested about $1 billion last year, that will allow the company to deliver video and super-high-speed Internet to consumers across the country.
Verizon has been preparing financially for big strategic moves for several years. In order to lower its debt load, Verizon has sold numerous assets, including lines in Hawaii for $1.5 billion. The company reported a debt load of $39.3 billion at the end of 2004, down about $20 billion from some four years ago.
Qwest's aggressiveness in pursuing MCI underscores Qwest's predicament. All around it, the nation's top telecom companies are merging, cutting costs and creating truly national brands. Without a way to aggressively cut its $17 billion in debt, Qwest is likely to be left on the sidelines, with little capital to improve its market position. |
