Verizon to acquire MCI for $5.3 billion in equity and cash, with special dividend taking value to $6.75 billion

February 14, 2005

6 Min Read

NEW YORK -- Verizon Communications Inc. (NYSE: VZ - News) and MCI, Inc. (Nasdaq: MCIP - News) today announced that Verizon has agreed to acquire MCI for $4.8 billion in equity and $488 million in cash.

The transaction adds new strength to the telecommunications services both companies provide. It ensures that consumers and businesses will have a supplier with the financial strength to maintain and improve MCI's Internet backbone network, which is the largest in the world based on company-owned points of presence.

The transaction will also mean better service for Enterprise customers by enhancing Verizon's ability to compete for and serve large-business and government customers with a complete range of services, including wireless and the most sophisticated IP (Internet Protocol) based services.

The Boards of Directors of both companies have approved the agreement.

MCI shareowners will receive 0.4062 shares of Verizon common stock for each common share of MCI. This is worth $4.795 billion and equivalent to $14.75 per MCI share, based on Verizon's closing price on Friday, Feb. 11.

MCI shareowners will also receive $1.50 per MCI share in cash, worth $488 million. This consideration is subject to adjustment at closing and may be decreased based on MCI's bankruptcy claims-related experience.

In addition, MCI will pay its shareowners quarterly and special dividends of $4.50 per share, worth $1.463 billion. This includes a 40-cent-per-share quarterly dividend approved by the MCI Board on Friday, Feb 11.

In total, the transaction values MCI shares at $20.75 a share, or $6.746 billion.

Verizon will assume MCI's net debt (total debt less cash on hand), targeted to be approximately $4 billion at closing, and customary closing conditions will apply.

In addition to MCI shareowner approval, the acquisition requires regulatory approvals, which the companies are targeting to obtain in about a year.

'The Right Deal'
"This is the right deal at the right time," said Verizon Chairman and CEO Ivan Seidenberg. "We have been evaluating a transaction with MCI for some time, and now we have the opportunity to reach an agreement at the right price that works for both companies and at a time when MCI is gaining momentum. It is a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies.

"This acquisition builds on and accelerates Verizon's growth plan in the Enterprise market, and it facilitates our becoming a major provider in that market sooner and less expensively than if we had continued on a path of organic growth. The acquisition will significantly enhance our customer service and competitive positioning by giving us a global reach, a suite of IP-based and value-added services, and a powerful, broad base of large-business and government customers.

"With the two companies' operational resources and investment capacity, we plan to drive efficiencies, increase cash flow and pursue new revenue opportunities. The company will have a strong balance sheet and the financial flexibility to continue to reward shareowners through investment and growth."

'The Right Partner'
"With our heritage of innovation, global network and world-class Enterprise capabilities, MCI is the right partner for Verizon," said Michael D. Capellas, MCI president and CEO. "Combined with Verizon's financial strength and record of operational excellence, we will accelerate delivery of next-generation services, broaden our product portfolio and better serve our customers."

Key Benefits
Seidenberg and Capellas emphasized that the transaction is part of the continuing evolution of the industry that is driven by customers and technology. They highlighted several key benefits that the companies' complementary assets bring to the market:

For Enterprise customers, the transaction creates a strong competitor that, in most markets, will challenge a larger incumbent. The more-efficient operating structure will drive better value, and Verizon will be able to offer a suite of services that address a full range of customer needs. The transaction also strengthens the long-term viability of MCI's global network, which is a critical component of government communications systems, including those used by the Department of Defense and the Department of Homeland Security.

For consumers and other business customers, the post-transaction company will continue to have sufficient cash flow and capital capacity to sustain its rapid deployment of wireline and wireless broadband networks and services.

Internet users in the United States will have a strong backbone platform for their traffic, and together the two companies can make greater investments in their backbones and offer the highest quality of service. In a multi-media market where technology platforms compete against one another to provide services, having strong backbone networks will enhance the post-transaction company's ability to deliver advanced services over owned and managed facilities to benefit consumers and small- and mid-sized businesses.

Internationally, the transaction creates a strong, U.S.-based globally competitive network and services provider, positioned to put an American company in a leadership role in the globalization of telecommunications.

For investors, the combination will enhance the company's competitive positioning and long-term financial flexibility.

Financial Effect
In the first year following closing, the transaction is expected to have an approximate 10-cent-per-share dilutive impact on Verizon's earnings per share, excluding acquisition costs and any amortization of intangible assets that may be created at the time of the acquisition. Verizon expects the transaction to be essentially breakeven in year three, and cash flow will turn positive in year three.

Verizon estimates that the acquisition will yield a net present value of $7.0 billion in incremental revenues and operational savings, including investments in network and systems to achieve these savings. The costs are estimated to be approximately $1.0 billion to $1.5 billion in expense and $2.0 billion in capital during the first three years, as the company will commit appropriate resources to maintain and upgrade the MCI assets.

The company expects a net annual run rate of $1 billion in pre-tax savings in the third full year after closing.

Verizon's $4.8 billion in equity to purchase MCI represents 132.1 million Verizon shares, or approximately 4.5 percent of Verizon's outstanding shares.

The companies will determine operational plans, such as branding strategies and organizational structure, as the transaction moves closer to closing.

MCI Inc.

Verizon Communications Inc. (NYSE: VZ)

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