In the biggest telecom takeover battle since it won U S West in 1999, Qwest Communications International Inc. boosted its bid to acquire MCI Inc. on Thursday, hopeful $8.45 billion will be enough to break up the long-distance carrier’s plan to merge with Verizon Communications Inc.
The nearly half-billion dollar increase — making Qwest’s offer $1.8 billion higher than the current value of MCI’s deal with Verizon — was sure to intensify pressure on MCI’s board to either switch merger partners or squeeze more money from Verizon.
MCI, still apparently desirable despite its damage from the WorldCom scandal, said its board will respond to Qwest’s new offer by the close of business on March 28.
Verizon responded by repeating its contention that both Qwest and its offer were financially dubious. The company declined to say whether it might consider renegotiating the price.
Many observers expect Verizon to pay more now, but that it might not need to match Qwest’s offer since it is still MCI’s first choice.
Qwest’s proposal reiterated projections that it could produce twice as much in cost savings as Verizon. Qwest also said MCI’s lawyers have apparently agreed a Qwest deal would gain government approval quicker than a Verizon merger because of competitive concerns.
If MCI decides a rival bid is superior, Verizon has five days to make a counteroffer.
Qwest CEO Dick Notebaert told The Associated Press that his team put together the revised bid after MCI provided new information not disclosed during earlier talks.
“My gracious, it’s hard to imagine that we do not have a superior bid under any calculation,” Notebaert said.
Analysts said a key question is whether Qwest can come through with its promised cost savings, predicated largely on up to 15,000 job cuts.
“With the bid that Qwest has in now, if they can deliver all the cost savings that they’ve targeted, if you believe that, then this bid makes sense,” said Donna Jaegers of Janco Partners.
“But there is a big difference between a Power Point presentation and actually implementing the consolidation and getting those sort of savings,” she said. “If I were on the MCI board, I’d certainly be chasing Verizon to see if they can get it closer.”
John Hodulik of UBS Investment Research said he expected a counter-bid from Verizon if MCI accepts Qwest’s offer. “We believe that Verizon can maintain a spread to Qwest’s offer and still be considered superior by MCI’s board,” he wrote in a research note.
The very public battle for MCI began last month when its board accepted Verizon’s lower offer over an $8 billion bid from Qwest, concerned about the Denver-based phone company’s financial health and prospects.
Criticism from some MCI shareholders, particularly hedge funds and other short-term investors wanting the highest possible payoff, prompted the company to reconsider Qwest’s offer.
The revised bid values MCI’s stock at $26 per share, consisting of $10.50 in cash and $15.50 in Qwest stock. Overall, that amounts to about $3.4 billion in cash and slightly more than $5 billion worth of Qwest stock.
Those terms represent an increase of $1.40 in the cash component of the offer compared with the revised proposal Qwest submitted in late February. That bid valued MCI at $24.60 per share, or $8 billion overall.
The merger agreement reached with Verizon currently values MCI at $20.30 per share, or about $6.6 billion. That includes $2 billion in cash, or $6 per MCI share.
A source familiar with Verizon’s thinking told the AP that Verizon does not need to increase its offer to $26 a share.
“Verizon could go a little higher. Or it could say, ‘We don’t need to do anything,’ and could wait a year until (MCI and Qwest) decline further and scoop it up at a lower price,” said the source, who spoke on condition of anonymity.
The new Qwest bid also retains a guarantee on its stock, which would increase the amount of Qwest shares paid if they decline in value at the time the proposed deal closes.
Underscoring the worries about Qwest’s shares which led to that protection, the stock fell Thursday to the level below which the guarantee would be triggered.
Still, Notebaert said MCI’s market price, well above what Verizon is paying, shows that investors see validity in Qwest’s offer and projections. He also said the company has commitment letters for financing to close the merger and operate the combined company.
“If there was any concern for either our current position or the future — and let’s get to the heart of it, what’s the future of Qwest-MCI — then you would not see the market acting the way it is,” Notebaert said. “The market is voting, not the critics.”