On March 28, the date Verizon set for MCI Inc. to give Qwest Communications International Inc. a yes or no answer to Qwest’s takeover bid, the result was … another deadline a week later.
Qwest issued a new deadline to MCI yesterday, giving the long-distance telephone company one more week to decide if it will accept buyout proposal from Qwest which is, at least on paper, a far richer one than that being offered by Verizon Communications Inc., MCI’s other suitor.
TheDeal.com reported that a s Qwest pursues MCI, the possibility of a bidding war with Verizon Communication Inc. persists even after the target’s March 28 deadline.
According to the Associated Press news of the ultimatum, delivered in a letter to MCI’s board, also said Qwest Communications International Inc. lenders have committed an extra $500 million in financing to back the $8.45 billion bid, which is currently worth $1.9 billion more than the Verizon deal.
MCI Inc., formerly known as WorldCom, declined to comment on the letter or on whether a week of negotiations with Qwest had proven fruitful. Qwest’s letter said it now has $5.75 billion worth of outside financial backing and has submitted a revised proposal to MCI.
Verizon agreed last week to give MCI until yesterday to meet with Qwest. Verizon has the confidence MCI will accept its bid over that of the far more financially unstable Qwest.
According to MarketWatch MCI’s board met yesterday, as investors who hold at least 26 percent of MCI shares have pressured the board to hold further talks with Qwest, which has twice sweetened its bid with more cash.
“Since both of us recognize the importance of reaching a decision promptly, we think it is reasonable to inform you that if we have not executed an agreement on or before midnight, April 5, 2005, our offer will be withdrawn,” the letter from chief executive Richard Notebaert said.
MCI’s board has shown little enthusiasm or urgency to discuss even the sweetened $8.45 billion bid Qwest submitted two weeks ago despite growing pressure from some MCI shareholders to consider the higher bid.
Under the terms of its merger agreement with Verizon, reached in mid-February, MCI could reject Qwest’s courtship again and stick with Verizon, or it could declare Qwest’s bid “superior,” a determination that would trigger a five-day window for Verizon to respond with a better offer. Or it could try to buy itself more time by announcing that the Qwest offer has the potential to produce a superior deal, though the deadline set by Qwest could make that option less likely.
Qwest sounded like it’s more confident of its financial footing. “Over the holiday weekend we have strengthened (financing) commitments in significant respects in response to the MCI Board’s requests made through its advisers on Friday,” Notebaert’s letter said.
Denver-based Qwest has offered $26 per share for MCI, consisting of $10.50 in cash and Qwest shares worth $15.50. CIBC World Markets analyst Tim Horan told TheDeal.com that Qwest would offer as much as $28 per share, though he wrote in a report last week that Verizon could still prevail with a bid of $25. At press time, Verizon’s bid stood at $20.75.
Verizon, which dominates phone service in the Northeast and Mid-Atlantic, has agreed to pay stock and cash currently worth $20.10 per MCI share. That includes $6 cash and Verizon stock currently worth $14.10.
Todd Rosenbluth of Standard & Poor’s pointed to the downside of loading a bid with cash, saying, “Every dollar that they’ve raised their offer has been cash that will not be used to run the business.”
At the end of 2004, Qwest had nearly $16.69 billion of long-term debts and just $1.77 billion in cash and liquid assets. The company lost $1.79 billion for the year as revenues fell 3.4 percent to $13.81 billion, generating just $1.85 billion in free cash flow from operations.
By contrast, although Verizon ended 2004 with long-term debts of $37.67 billion and just $4.55 billion of liquidity, its business generated $71.28 billion of revenue, net income of $7.83 billion, and $21.82 billion of cash.
On Feb. 14, MCI accepted a $6.7 billion takeover offer from Verizon, the largest telecom services provider in the U.S., after spurning a higher offer from Qwest. MCI’s board chose the Verizon offer because it judged the company a more attractive suitor than Qwest, the smallest of the remaining Bell telephone companies.
Verizon is under pressure to obtain a large long-distance network to maintain pace with rival SBC, which recently agreed to acquire AT&T for its network and stable of corporate clients.
David Sims is contributing editor and CRM Alert columnist for TMCnet.
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