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Qwest's Sweetened Offer Puts MCI on the Hot Seat

Board Must Choose: Money or Verizon's Stability?

By Yuki Noguchi
Washington Post Staff Writer
Friday, March 18, 2005; Page E05

With Qwest Communications International Inc. adding another stack of cash to its takeover offer, MCI's board of directors yesterday began weighing whether to sell their company for Qwest's dollars or Verizon's promise of long-term stability.

MCI Inc., based in Ashburn, said it would make a decision by March 28.


Qwest CEO Richard C. Notebaert, shown at the 2004 annual meeting, says further scrutiny of MCI revealed "additional value." (Ken Papaleo -- Rocky Mountain News Via AP)

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Qwest added more than a half-billion dollars to its offer Wednesday, along with assurances that it has the resources to carry off the deal. Verizon Communications Inc., trying to persuade MCI to stay with an earlier agreement to sell to Verizon, questioned Qwest's ability to spend so much.

MCI shareholders, who must eventually vote on either deal, are evaluating the bids as well.

"This [new Qwest offer] will nudge a few more over into the Qwest camp," said Robert Saunders, director of research at the Eastern Management Group, a management consultancy.

Although Verizon is a stronger company, the wide gap between the two competing offers makes it hard for MCI's board members to justify sticking with Verizon, he said.

Verizon can still make a counteroffer. "I think they [MCI's board] hope Verizon will take a small step to narrow the gap," Saunders said.

Denver-based Qwest presented its sweetened offer to MCI's board late Wednesday, offering a total of $8.45 billion, or $10.50 in cash and $15.50 in stock for every MCI share. Its previous offer gave MCI shareowners $9.10 a share in cash and $15.50 in stock, for a total of $8 billion, which was already more than the $6.75 billion Verizon had pledged.

"Over the last couple of weeks, we had the opportunity to perform legal, financial and operational due diligence [on MCI], and in doing that we think we found some additional value," so the company raised its offer, Qwest chief executive Richard C. Notebaert said in an interview yesterday. The company reviewed MCI's network performance, its capital requirements, and potential efficiencies gained by increased purchasing power and consolidated marketing in making that determination, he said.

Verizon responded by calling Qwest's offer qualitatively inferior to its own. Verizon, the largest U.S. telecommunications company, is more financially stable than Qwest and sells a broader array of technologies, including cellular phone service. MCI's board accepted Verizon's offer last month, but after Qwest countered with a new offer on March 2, Verizon agreed to allow MCI to continue discussing alternative bids with Qwest for two weeks. That discussion period ended yesterday.

Verizon spokesman Eric Rabe reiterated the company's assertion that Qwest, with more than $17 billion in debt and less than $2 billion in cash, lacks the wherewithal to consummate a deal or continue to invest in MCI's networks.

"Qwest's most recent bid does nothing to address the fundamental concerns we have identified, while increasing the amount of cash to be paid out to shareholders exacerbates the risks," Rabe said in an e-mailed statement.

That prompted Notebaert to say his company has its banks' backing for the deal. "We are fully funded. We have adequate cash to do this," he said.

Analysts said Qwest's latest offer presents a new challenge to MCI's directors, who have been hearing from a growing chorus of MCI shareholders interested in the Qwest deal.

MCI's largest shareholder, Mexican telecom magnate Carlos Slim, and other big shareholders have expressed dismay at Verizon's lower price. But others say they are still undecided as to which company represents the better deal.

"I think MCI's board has a very difficult task because there is such a value gap" between the two deals, said one major shareholder, who spoke on condition of anonymity because he works for a private fund. Verizon has offered less, "but I am not a believer in Qwest." He said he was keeping "a very open mind on this one. I don't think it's clear."

Shares of MCI fell 45 cents to close at $23.30. Qwest fell 8 cents, to $3.74 a share. Verizon shares fell 13 cents, to $35.21.


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