Qwest bid for MCI may attract stockholders

Many still believe Verizon is a better fit with MCI

WASHINGTON - Qwest Communications International's announcement late Thursday that it plans to renew its bid for MCI could leave MCI stockholders with a tough decision between Qwest and rival bidder Verizon Communications, telecom analysts said Friday.

Qwest on Friday didn't return phone calls seeking comment on its plans, but its new offer could be higher than the $8 billion bid made Feb. 11. MCI rejected that offer in favor of a $6.7 billion deal with Verizon announced Monday, and MCI officials said then that a marriage of their company with Verizon made the best sense moving forward. Verizon and MCI both declined to comment.

A higher bid from Qwest, even though the company holds $15.3 billion in debt, could lead to demands from some stockholders that MCI get the best stock deal possible, said Jay Pultz, research vice president at analyst firm Gartner Inc. Many current MCI stockholders were investors in MCI during its bankruptcy under the WorldCom name, Pultz noted.

"They have to be very anxious to take the money and run," he said of WorldCom investors.

That desire of stockholders to cash in on old debts would cause a conflict with MCI executives, who have named Verizon as their best partner, added Nancy Kaplan, vice president of telecom strategy consultant Adventis. It's possible, depending on Qwest's new bid, that stockholders could talk about filing lawsuits if MCI's executives continue to push for a Verizon deal at a lower price, she said.

"In the short term, (the Qwest deal) is more attractive to shareholders," Kaplan said. "The problem is, in the long term, MCI has said Verizon is a better fit. You're trading off short- and long-term risks."

Both Qwest and Verizon have bid on MCI after rival telecom giant SBC Communications announced in January it intends to acquire AT&T. That $16 billion deal would make SBC the largest U.S. telecom carrier, passing Verizon.

Qwest Chairman and Chief Executive Officer (CEO) Richard Notebaert, in a Thursday letter to MCI's board, said a combined Qwest/MCI could achieve higher cost savings than the $1 billion a year in the second year and beyond estimated by Verizon and MCI in their deal. "Published reports, including public disclosures by MCI's President and CEO, indicate that the consideration to MCI shareholders in the Verizon proposal is substantially less than the consideration Qwest offered to MCI shareholders," Notebaert said in the letter, provided to the U.S. Securities and Exchange Commission (SEC).

Analysts said Qwest has the means to pull off a deal for MCI, but most agreed that Verizon is a better fit in terms of finances and complementary services offered by the companies. Verizon's debt at the end of 2004 was $39.3 billion, but its yearly revenues were $71.3 billion. Qwest had a full-year revenue of $13.8 billion for 2004.

In addition, Qwest faces an ongoing federal investigation into its accounting practices, even after the company agreed to pay $250 million in fines to the SEC in October 2004. On Thursday, as Qwest announced it was still in the MCI race, a federal grand jury in Denver indicted former Qwest Executive Vice President Marc B. Weisberg on wire fraud and money laundering charges, stemming from his tenure at Qwest.

Despite Qwest financial and legal challenges, either merger could work, said Jeff Kagan, an independent telecom analyst.

"Sure, Verizon has fewer problems than Qwest and they are a much larger company than Qwest, but make no mistake, both Verizon and Qwest could use MCI to transform into a national provider of business services for the coming years," Kagan said by e-mail. "I think there will be plenty of telecom mergers in the next few years."

Kagan expressed surprise that MCI took Verizon's bid so quickly. "While they may end up with Verizon anyway, they didn't play their price up," Kagan said. "(That was) not a shrewd move by (chief executive Michael) Capellas at MCI. But Notebaert at Qwest may give him a second chance."

Gartner's Pultz predicted Verizon would wind up with MCI in the end. A combined Qwest/MCI would be a "weak competitor" to a combined SBC/AT&T, because it wouldn't be big enough, he said.

"If it becomes a bidding war, certainly Verizon has deep enough pockets to win, if they want to win," Pultz said. "We still think Verizon will end up with MCI."

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