updated 2/10/2005 8:15:43 AM ET 2005-02-10T13:15:43

Verizon Communications Inc. has reportedly floated an informal counterbid to buy MCI Corp., offering about the same for the long-distance phone company as Qwest Communications Inc. in hopes that MCI management and investors would prefer a deal with a stronger company.

The potential offer, reported Thursday by The Wall Street Journal, marks another twist in a two-week frenzy of merger speculation prompted by SBC Communication Inc.’s deal to acquire AT&T Corp., and an almost year-long effort by MCI to sell itself.

Verizon, which declined to comment, has been steadfast that it doesn’t need to make such an acquisition in response to the $16 billion AT&T buyout, which would make SBC a much more formidable rival.

MCI also declined to comment on the report, which came about a week after revelations the troubled company has been discussing a $6.3 billion takeover by Qwest, the dominant local phone company across the Rocky Mountains and Pacific Northwest.

Although MCI’s reputation remains tarnished by a massive accounting scandal, and its business inflicted with the same ills as the rest of the long-distance industry, the company has some very valuable assets for largely regional telephone companies like Qwest and Verizon.

Topping that list are MCI’s national network infrastructure and its sizable base of consumer and business customers, which number 15 million despite a sharp decline fueled by price wars and competition from cell phones and Internet-based calling.

Industry observers said the deal made sense for Verizon, which is a national player in the wireless sector and has struggled to build a clientele among large corporations with national communications needs.

Perhaps more important, MCI investors may have reacted poorly to the prospective Qwest deal, which would bring payment in shares of a company marred by its own scandals and a far weaker financial profile.

Denver-based Qwest lost $1.66 billion during the first nine months of 2004, a period during which revenues fell about 4 percent to $10.37 billion compared with a year earlier. On the balance sheet, the Denver-based company had debts of $17.2 billion at the end of September, vs. cash of about $1.81 billion.

“This development puts the ball squarely back in Qwest’s court. We believe that a greater cash component and Verizon’s currency would make a deal with Verizon more attractive to MCI shareholders,” John C. Hodulik, an industry analyst for UBS Investment Research, said in an update to investors.

Qwest still in the running
Working in Qwest’s favor is the widely held belief that Verizon would prefer to acquire Sprint Corp. which has a much healthier balance sheet than MCI, no scandal to overcome, and a wireless operation which uses the same technology as Verizon Wireless.

One expert also noted that MCI and Qwest have an established working relationship which may ease the way toward an agreement.

Last year, after a federal court threw out rules forcing the Bells to lease their local phone lines to companies like MCI at discounted government-set rates, Qwest and MCI were the only two major players to heed the call of the Federal Communications Commission by forging their own agreement on rates.

“This shows the two companies were able to cooperatively come to a solution in an area where all other (Bells) and (long-distance companies) were polarized,” said Allen Long, president of the industry consulting firm Long & Associates LLC. “So MCI and Quest already have the beginning of a track record of working well together.”

MCI, based in Ashburn, Va., emerged from bankruptcy last spring, its balance sheet cleaned of debt and its name changed from WorldCom. At last count, the company had slightly less than $6 billion worth of debt and about $5.5 billion of cash.

Shares of MCI, up 12 percent in two weeks since the merger speculation began, fell 40 cents to close at $20.46 in Thursday’s trading on the Nasdaq Stock Market. Verizon shares closed 2 cents lower at $36.04 on the New York Stock Exchange. Qwest shares fell 12 cents, or 3 percent, to $4.16, also on the NYSE.

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