Qwest submits new proposal to MCI's board of directors

February 24, 2005

8 Min Read

DENVER -- Qwest Communications International Inc. (NYSE: Q) today submitted the following letter to the board of directors of MCI. Qwest also filed a form 8-K. The text of the letter is below:

February 24, 2005
The Board of Directors
MCI, Inc.
Attention: Chairman, Board of Directors
22001 Loudoun County Parkway
Ashburn, VA 20147

Dear Mr. Katzenbach:

Despite being denied access to MCI legal, financial and operational information that has been provided to other interested parties, on February 11, 2005, Qwest proposed a stock and cash merger with a value of $24.60 per MCI share. Qwest reconfirmed this proposal to MCI on February 13, 2005. MCI has failed to provide meaningful guidance or direction in response to the Qwest proposal. Consequently, with only press reports and lawsuits as sources of information for how the MCI Board evaluated the components of our proposal, Qwest tenders this revised proposal, the terms of which are even more compelling for your stockholders.

Before turning to a discussion of the particulars of Qwest's revised proposal, it is important to emphasize that a Qwest/MCI merger would create an exciting and important new telecommunications company, of which MCI would become a meaningful part. The merger of Qwest and MCI would create a company with a strong market position, demonstrated commitment to superior customer service and innovative products and services, and the potential for significant value creation through cost synergies. The combination would create the industry leader in IP, with the most advanced IP-based network and compelling suite of IP based services. We believe that it was these prospects that caused MCI to discuss a proposed combination with Qwest continuously over the last ten months. We remain excited about the future of our combined companies competing in the telecommunications marketplace and we are committed to our belief that a Qwest/MCI merger creates a superior value opportunity for the MCI stockholders as compared to a Verizon/MCI transaction.

Qwest believes this revised proposal is superior to the Verizon transaction, because it delivers greater value in cash and stock per MCI share, synergy value of approximately $18 per MCI share in a combined Qwest/MCI enterprise and more favorable regulatory certainty and speed.

In addition, Qwest has also submitted pro forma financial profiles to MCI that demonstrate that the merger of Qwest/MCI would, on the closing date, yield a balance sheet likely to result in a credit profile substantially similar to, if not better than, that enjoyed by the two companies today. The "business as usual" cash flows from the Qwest/MCI combination alone would drive immediate improvement in the credit ratios and the added cash flows from synergies would dramatically speed even greater improvement in those ratios. It should be noted that neither MCI nor Qwest has had any difficulty accessing the credit markets on a stand-alone basis, and Qwest is confident the combined company will also have no such difficulty.

Qwest is confident that the significantly smaller footprint overlap (business, consumer and network) in a Qwest/MCI combination will lead to fewer and less extensive divestiture demands from regulatory agencies and will avoid the industry concentration and public policy issues the Verizon/MCI merger presents. Clearly, this simpler regulatory review process for a Qwest/MCI transaction will deliver value to stockholders faster and with fewer "friction costs".

With respect to synergies, Qwest advisers and management believe -- and it would appear a substantial number of MCI stockholders agree -- that there are significant cost synergies available in a Qwest/MCI merger. The value of these synergies can only be realized by MCI stockholders in any meaningful way if those stockholders retain a substantial portion of the combined company as they will in a Qwest/MCI merger (where they will retain approximately 40%) as opposed to a Verizon/MCI combination where they will only retain 5% of the combined company. Estimates of these potential cost synergies come from many sources including: MCI public statements about their stand-alone efficiencies, discussions between Qwest and MCI and analyses of potential cost synergies carried out under our non-disclosure agreement that took place continuously over the last ten months and Qwest management experience with such matters.

In addition to the balance sheet, regulatory and synergy benefits to MCI stockholders of a Qwest/MCI combination summarized above, Qwest would like to describe the modified economic terms of our proposal and highlight some enhancements to our previous proposal, which should be even more compelling to MCI stockholders. Qwest's revised proposal represents an aggregate value today of $24.60 per share to MCI stockholders consisting of $9.10 in cash and $15.50 in stock consideration to be delivered as follows: (i) $6.00 per share in cash to be paid by MCI in regularly scheduled quarterly dividends and in a special dividend upon MCI stockholder approval of the transaction, (ii) $3.10 in cash per share to be paid by Qwest at closing and (iii) $15.50 per share to be paid in Qwest stock at closing. In addition we have provided protection to your stockholders from a potential decline in the Qwest share price during the period between signing and closing by means of a "collar". Further economic details of our proposal are provided in the term sheet attached hereto as Exhibit A. [To see exhibits, please go to www.qwest.com.]

Additionally, to facilitate the MCI Board's deliberation, Qwest would enter into an agreement with representations, covenants, closing and termination provisions substantially comparable to those in the Verizon agreement, except for certain improvements for the benefit of the MCI stockholders, as summarized below and more fully described on Exhibit B hereto. A copy of the merger agreement marked to show Qwest's proposed changes from the Verizon agreement will subsequently be provided to your legal counsel. Any merger agreement would be subject to approval by Qwest's Board of Directors.

In summary, the structural improvements in Qwest's proposal as compared to the Verizon merger agreement include:

  • -- There is greater flexibility to creatively expedite the regulatory approval process without jeopardizing the transaction because Qwest will agree to take remedial actions required to solve regulatory problems other than those that would have material adverse effect on the combined company (Verizon's required remedial actions are measured by whether they would have a material adverse effect on either Verizon (considered as the size of MCI) or MCI);

    -- There is greater commitment to close a Qwest/MCI transaction quickly because Qwest will commit to avoid any action that would materially delay the closing beyond the date otherwise achievable (Verizon has retained the right to delay closing under certain circumstances);

    -- MCI's regularly scheduled quarterly dividends will be paid and a special dividend will be paid at the time of MCI stockholder approval in an aggregate amount equal to the total MCI "excess cash" as determined by MCI in accordance with its plan of reorganization (representing a near-term payout to MCI stockholders of approximately $1.50 per share more than under the Verizon proposal); and

    -- MCI stockholders will be protected from a potential decline in Qwest's share price prior to closing by means of a "collar" (Verizon provides no such downside protection against movement in its share price).

To promptly finalize the terms of a merger agreement Qwest is prepared to execute, Qwest requests that MCI provide Qwest the following materials -- the schedules MCI delivered in connection with the Verizon/MCI agreement, including copies of the documents referenced therein, and certain MCI tax information which MCI previously indicated it would deliver to Qwest. To simplify the MCI Board's review of Qwest's revised proposal, Qwest has based this proposal on the Verizon/MCI merger agreement. However, it has been particularly difficult for Qwest to submit a revised proposal that highlights all of the advantages of a Qwest proposal because the disclosure schedules and other exhibits to the merger agreement remain secret and are unavailable to us.

Finally, we would note that based upon today's closing prices for both Qwest and Verizon, the value of our offer to the MCI stockholders is approximately 20% higher than the Verizon offer, before taking into account the superior synergy value of $18 per MCI share and the enhanced regulatory benefits of the Qwest transaction.

MCI's agreement with Verizon allows MCI to engage in negotiations with Qwest and provide Qwest information in light of the superior proposal summarized by this letter. The Verizon agreement also allows MCI to negotiate and provide Qwest information merely upon its determination that Qwest's revised proposal could reasonably be expected to lead to a superior proposal as compared to the Verizon acquisition. The facts demonstrate that it is in the best interests of MCI stockholders for MCI to engage with Qwest immediately in meaningful discussions regarding Qwest's improved revised proposal and Qwest urges you to do so.

Sincerely yours,

Richard C. Notebaert
Chairman and Chief Executive Officer

cc: Mr. Larry Grafstein
Lazard Freres & Co.

Mr. Phillip Mills
Davis Polk & Wardwell

Qwest Communications International Inc.

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