News: Analysis & Commentary: DEALS
GTE GOES FROM BAIT TO BIDDER
MCI shareholders may prefer its cash to WorldCom's stock
For months, GTE Corp. was rumored to be takeover bait. The most persistent speculation was that long-distance leader AT&T would buy the company to jumpstart its push into the $100 billion local telephone business. GTE Chief Executive Charles R. Lee never confirmed the rumors--or denied them. "I'll continue to explore other business arrangements to the extent that they make sense for helping our shareholders," Lee told BUSINESS WEEK in July.
Turns out, Lee had a different kind of business arrangement in mind. Instead of being the hunted, Lee wants to be the hunter. On Oct. 15, GTE made a surprise $28 billion, cash offer for MCI Communications Corp., the No.2 long-distance company in the U.S. The bid came two weeks after telecom upstart WorldCom Inc. offered $30 billion in stock--all but disconnecting a prior deal in which British Telecommunications PLC had agreed to buy the 80% of MCI it doesn't already own for about $20 billion. WorldCom reacted to the GTE bid by saying its offer is still the most valuable. In a statement, MCI said it would review the third bid "in the context of the company's strategic merger agreement with BT."
"BOLD MOVE." Now, instead of facing early retirement as the phone business consolidates, the 57-year-old Lee hopes to end his career as head of a newly created $40 billion telecom giant. "This is a very bold move for him, and it clearly moves GTE up into the set of first-tier players--if he can complete the deal," says Eric J. Riddleberger, a telecom consultant at Booz, Allen & Hamilton Inc.
Who will walk away with MCI? Bankers say GTE's bid could be the most appealing. Even though it's 7% less than WorldCom's offer, shareholders may prefer cash to WorldCom stock, which could lose ground in the year or more it would take to close the deal. WorldCom could increase the value of its stock offer but is unlikely to attempt a significant cash bid. "WorldCom's going to have to do a heck of a sales pitch," says Bruce E. Behrens, co-manager of Flag Investors Telephone Income Fund, which holds stock in all three companies. BT, meanwhile, is unlikely to up its offer, having cut its bid by 20% last summer to appease shareholders.
In fact, BT may welcome the GTE bid. Sources close to BT say that the British concern encouraged GTE, which had discussed a merger with MCI prior to the BT bid, to try again. One reason: BT wants to keep its marketing alliance with MCI alive, and the chance of doing that under WorldCom looked dicey. Says one industry analyst of the GTE bid: "This has to make BT happy."
GTE and MCI also have a lot to offer each other strategically. MCI has been spending heavily to launch a local phone business. This year alone, the unit is expected to run an $800 million loss. For GTE, MCI provides an excellent entree into long distance. GTE has been forging into that territory on its own, signing up some 1.5 million customers. But analysts say the effort has been slow and costly. "A lot of planets line up here," says Riddleberger.
Still, there are potential problems. Analysts estimate that the $28 billion bid will dilute earnings about 20% in 1998. And even after a merger with GTE, MCI might still have to plow money into local connections to serve its urban business customers since GTE operates mostly in rural and suburban areas.
WorldCom's CEO Bernard J. Ebbers is unlikely to walk away from MCI. He may not be able to to match the cash offer, but he can demonstrate more potential for post-merger savings. WorldCom, for example, already has local connections in many major cities. Ebbers estimates that a combined company can save $5 billion annually by 2002. "A WorldCom-MCI deal makes the most sense strategically," says Scott Cleland, an analyst with Legg Mason Wood Walker Inc. But in the end, Lee's cash may bag the trophy.By Peter Elstrom in New York with Catherine Yang in Washington and Susan Jackson in Stamford, Conn.Return to top