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Analysts: Verizon Will Ante Up

Light Reading
News Analysis
Light Reading
4/29/2005

Verizon Communications Inc.'s (NYSE: VZ) deadline for responding to MCI Inc.'s (Nasdaq: MCIP) unexpected embrace of Qwest Communications International Inc.'s (NYSE: Q) latest bid comes at midnight Friday, and analysts believe Verizon will likely increase its bid.

“They’re probably going to raise their bid to something like what they agreed to pay Carlos Slim, which is around $26, maybe $27 a share,” says analyst Joe Bonner of Argus Research.

Verizon, earlier this month, agreed to purchase MCI majority shareholder Carlos Slim’s shares at $25.72 (see Verizon Buys Slim's MCI Stock, Qwest Responds to Verizon's MCI Stock Buy, and MCI Reacts to Verizon-Slim Transaction).

Under the terms of its original deal with MCI, Verizon must respond by midnight to the MCI board’s determination five days ago that Qwest’s latest bid is “superior" (see MCI Gives Qwest Hope and Verizon Responds to MCI/Qwest).

Bonner believes, however, that Verizon isn’t willing to stay in the bidding game much longer. “It’s gone on long enough; they are going to go another round, then who knows,” Bonner says. “The price has been getting very high and by most estimates, it has gotten too high already.”

Analyst Michael Bowen of Friedman Billings Ramsey & Co. Inc. says Verizon will respond with a counter offer in the $26 to $27 per share range, a move he believes is a mistake.

“I think MCI is overvalued at these levels, but what I think will actually happen is that Verizon will come back with some type of an offer, and then the [MCI] board will have some decisions to make.”

Bowen, however, does not believe that a finale is necessarily in sight. “At this point I think egos have gotten involved and I think both sides are trying to win it, so I think it could still be several weeks away.”

The analysts say a failure to acquire MCI would not be as damaging for Verizon as it would be for Qwest (see Qwest: Twice Bitten, Not Shy).

Argus’s Bonner believes that should Verizon walk away from the deal, it will look into putting some resources into growing its enterprise business, which was the original point of the MCI acquisition.

If it walks away, Verizon would also receive from MCI a breakup fee of $240 million plus up to $10 million in expenses.

Qwest would also pay Verizon for the MCI shares it bought from majority shareholder Carlos Slim. “They could also walk away with $30 per share for something they just paid $25.72 for,” says Friedman’s Bowen. “So that’s a pretty good trade, they could walk away with about $425 million dollars and just go away.”

Others are saying today that tonight’s deadline isn’t exactly set in stone. “It is true they’ve got five days to respond, but MCI doesn’t need to respond to Qwest until Tuesday,” says analyst Viktor Shvets of Deutsche Bank AG North America. “So in theory nothing necessarily needs to happen tonight; Verizon has another day on Monday.”

Verizon spokesman Peter Thonis was silent on what Verizon intends to do, but he confirmed that Verizon recognizes tonight’s deadline.

Qwest is simply watching and waiting today. “MCI’s contract with them says they have until midnight tonight, but there is no real deadline by which they have to do something,” says Qwest spokesperson Steve Hammock. “Right now we have a superior offer.”

Qwest announced today its proxy solicitor had surveyed a majority of MCI shareholders and found they would still prefer Qwest’s $30 per share offer, even if Verizon raised its per share offer to $25.72 (see Qwest Won't Qwit on MCI).

Hammock would not say what Qwest’s response would be should MCI accept a Verizon per-share offer of $25.72, or an offer comparable to the Carlos Slim price.

— Mark Sullivan, Reporter, Light Reading

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