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Qwest Raises Offer for MCI

Bid to Thwart Verizon Up by $550 Million

By Yuki Noguchi
Washington Post Staff Writer
Thursday, March 17, 2005; Page E01

Qwest Communications International Inc. increased its bid for MCI Inc. by more than $550 million in cash in its latest attempt to break up MCI's merger plans with Verizon Communications Inc., according to a source familiar with the deal.

Verizon's chief executive, meanwhile, sent a strongly worded letter yesterday to MCI's leadership questioning Qwest's ability to buy the company and still invest to sustain MCI's network.

Qwest and MCI offices in Denver are close to each other. Qwest wants to buy MCI. (Neal Ulevich -- Bloomberg News)

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"Qwest's claims do not pass a common sense test, and it has so far provided only scant supporting detail," Ivan Seidenberg wrote in the letter.

Competing offers from Qwest and Verizon touched off debate among MCI's shareholders, board members, and the companies over which would be the better deal. Qwest's latest offer, totaling about $8.5 billion in cash and stock, is now approximately $1.75 billion more than what Verizon offered last month.

MCI's board has said that a merger with Verizon made more sense in the long run, but a number of large shareholders think MCI should go for the higher price. After Qwest modified its first offer, Verizon gave MCI's board of directors two weeks, until today, to discuss alternative deals with Qwest. No deadline was set for MCI's board to decide.

Qwest submitted its new bid to MCI's board at a meeting in New York last evening, according to a source who spoke on the condition of anonymity because of the private negotiations. Qwest's previous offer totaled $24.60 a share, and Verizon's was $20.75 a share. Qwest's new bid would pay about $1.80 a share more in cash than its previous offer, the source said.

Last month, Ashburn-based MCI accepted Verizon's purchase offer of $6.75 billion in cash and stock. Some shareholders at MCI want a deal with Qwest because it is offering a higher price and a bigger stake in a combined Qwest-MCI. But proponents of the Verizon deal have said Verizon is a better long-term partner for MCI because it is far bigger and more financially stable than Qwest.

David Ahl, an adviser to four of MCI's large institutional investors, said the Qwest offer "is substantially larger than a deal with Verizon." He pointed out that MCI shareholders would own about 40 percent of the combined Qwest. A deal with Verizon would give MCI shareholders only about 4 percent ownership in the combined company. Ahl said that by his estimate, shareholders owning 40 to 50 percent of MCI shares -- including the 13.7 percent owned by its largest shareholder, Mexican telecommunications magnate Carlos Slim -- oppose the deal with Verizon.

In a written statement yesterday, Qwest chief executive Richard C. Notebaert said Qwest's offer would create a stronger company. "The new company will be financially strong, with significant free cash flow, and offer investors a unique growth opportunity," he said. "Let fairness, economics, and the best interests of shareholders decide this matter."

In the letter yesterday addressed to MCI's chief executive and chairman, Seidenberg chided Qwest's offer as "desperate," and said its claims of being able to save nearly $15 billion by combining with MCI were "exaggerated."

Qwest said it could eliminate as many as 15,000 jobs by merging with MCI. Verizon has said it would cut 7,000 jobs if it combined with MCI. Qwest also claimed that it will be able to cut $1.7 billion in costs during the first year of a merger and $2.5 billion to $2.9 billion afterward, but "telecom industry executives with actual experience serving major corporate customers know this sort of network integration takes time, money, and, most significantly, experienced personnel familiar with the customer's requirements," Seidenberg wrote.

Also yesterday, MCI said its fourth-quarter loss would be $145 million, $113 million more than announced last month, because it did not set aside enough money for taxes. The company said it would hire more people to oversee its internal financial controls, and that the change would not affect its merger plans with Verizon.

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