What Price MCI?
By Brian Grow
When Ivan Seidenberg, chief executive of Verizon Communications (VZ ), agreed to acquire MCI (MCIP ) on Feb. 14, he smugly declared the long-distance carrier was the telecom industry's last beachfront property. But Seidenberg was sadly mistaken if he thought Verizon's $6.75 billion offer would be viewed as a prime real estate price. Its bid was about $1 billion less than an earlier one from Qwest Communications (Q ).
MCI investors, schooled in the shareholder-fleecing scandals of its predecessor, WorldCom, were outraged. "The Qwest offer is superior to Verizon," says John Paulson, chief executive of investment firm Paulson & Co., which owns 11 million MCI shares.
As a Mar. 17 deadline approaches for MCI's board to accept or decline a new Qwest offer (still $24.60 per share, like the original one, but with some terms improved), speculation is mounting over whether Verizon is willing to up its bid. Seidenberg and his $71 billion Verizon juggernaut may have a hard time scoring an easy win in the battle for control of MCI. Qwest is mounting a ferocious counteroffensive. Meantime, MCI shares are already trading close to $3 more than the Verizon offer, a sign that investors anticipate a bidding war.
To score a victory, shareholders say Qwest must raise its bid. Plus, it needs to protect investors better from a share price that has gyrated in recent months. MCI shareholders have told Qwest that they want a "contingent value right" -- a clause written into the deal that would protect them from a drop in the company's future stock price.
Such a protection would also shield shareholders against a sudden exit by hedge funds once a deal is sealed, a move that could send Qwest's stock plunging. Most important, the suitor should be prepared to take its offer straight to MCI shareholders. "If Qwest wants a prayer of winning, it will at some point have to commence a share exchange offer," says Carl Schecter, managing director and head of risk arbitrage at Nomura Securities International in New York.
BusinessWeek Online has learned that the MCI board chose Verizon's bid in large part because Qwest failed to provide the directors with assurance that its finance agreements wouldn't fall apart. The MCI board wanted to see the conditions under which Qwest's banks could decline to deliver loans -- for example, if Qwest's stock price dropped suddenly. The segment of a loan agreement that establishes conditions for lenders to exit is known as a material adverse change clause. Qwest denies any problem with its initial loan agreements.
The execs on MCI's board were playing a cagey game of chicken from the get-go. MCI was aware that Verizon's offer, while solid, was low. That was one reason the directors asked for a $200 million breakup fee -- a manageable figure for Verizon or Qwest, according to analysts -- in the event Qwest decided to return to the table.
The board's assessment: Go with a firm offer from an exceptional merger partner, Verizon, but anticipate that Qwest might come back with a sweeter bid than its original. "The board knew that the Verizon bid didn't necessarily end the process," says one person familiar with its deliberations.
As the MCI board evaluates a new Qwest bid, the outcome, say analysts and investors, will not be shaped by shareholders in the game for the long term, but by the demands of vocal MCI investors dead set on getting the highest bid possible -- even if that means a deal with beleaguered Qwest. "Clearly, this board cannot do what boards have traditionally done: Take care of an amorphous shareholder base," says Patrick S. McGurn, special counsel at Institutional Shareholder Services. "This is a highly motivated and sophisticated group. If they don't like the deal, it's going to be thumbs down."
Irked by the board's decision to accept the Verizon offer, MCI's shareholders are making their voices heard. On Mar. 4, Mexican business magnate Carlos Slim Helu, MCI's largest shareholder, declared the Verizon deal "exceedingly low." His low opinion means shareholders owning a total of 26% of MCI oppose the Verizon deal, while a growing number of others are urging the board to give Qwest a fair hearing.
"My father told me I should marry the woman that loves me, not the woman I loved," says Leon Cooperman, chief executive of Omega Advisors, which owns 9.3 million MCI shares, in an interview with BusinessWeek Online. "We should go with the company that wants to give us the best offer."
The mounting "no's" have put Verizon in a pickle. With a deal in hand, the deep-pocketed Bell is loath to signal it will match or beat Qwest's $24.60-per-share offer. But analysts believe Verizon will have to raise its $20.75-a-share bid at least $1 billion to remain competitive.
"MATTER OF SURVIVAL."
MCI shareholders, meanwhile, are calling on Verizon to raise the stock portion of its bid to give them more than the 5% of the company they would currently receive. Qwest is offering MCI shareholders 40% of the firm. With a $100 billion market cap, Verizon can easily pay more. But the Bell has so far maintained its offer is fair because it believes the market factored in the full value of MCI -- and its risks -- when Verizon made its offer.
Forced to pay substantially more, Verizon could walk away. "There's a price that Verizon is willing to stop at, and it may be where they are today," says a source close to MCI's board.
Qwest, on the other hand, "views this asset as a matter of survival. Verizon views it as a quantum leap forward on its enterprise business," says one substantial MCI investor who declined to be identified. "All of this equals a number much higher than $24.60." That may be bad news for Verizon and a new hurdle for Qwest. But it's sweet music to MCI's profit-hungry investors.
With contributions from Christopher Palmeri in Los Angeles, Geri Smith in Mexico City, and Steve Rosenbush in New York.
Grow is a correspondent in BusinessWeek's Atlanta bureau
Edited by Beth Belton
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