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Battle for MCI Heads to the Wire

The countdown is on to determine what happens to long-distance carrier MCI Inc. (Nasdaq: MCIP). The company has just under a week left to review Qwest Communications International Inc.’s (NYSE: Q) $8 billion bid for the company (see Verizon OKs MCI, Qwest Talks).

Qwest, who was shunned by MCI in favor of a lower $6.75 billion offer from competitor Verizon Communications Inc. (NYSE: VZ), sweetened its deal in late February with better terms and a “collar” to protect MCI shareholders (see Qwest to MCI: 'Pretty Please?'). But many think that even that will not be enough to keep MCI from choosing the more financially endowed Verizon. "Clearly, if I’m MCI then I would want to go with Verizon,” says Mark Lutkowitz, a principle at Telecom Pragmatics Inc. “You need money to make a deal like this work, and Verizon is in a much better position.”

But Qwest spokesman Bob Toevs says that while some people believe Verizon’s is the better deal, Qwest’s offers more to MCI shareholders in the short and long term. “Our offer provides a superior value for shareholders,” he says. “We’re offering $6 in cash at shareholder approval, while Verizon is offering $4.50 at approval. “There are complimentary assets, which would result in a great combined company. And the shareholders distribution would be better, with investors getting 40 percent of the company, compared to around 5 percent with Verizon.”

Executives from each company have been playing up their offer as the superior deal in the press and at media events, muddling the situation even more. Qwest CEO Richard Notebaert has said that the industry faces a “duopoly” if Verizon wins out, something he believes is bad for the industry and consumers. And Verizon execs have played the national security card, saying Qwest wouldn’t have the money to upgrade and maintain the network (see Battle for MCI Heats Up).

MCI’s largest shareholder, billionaire Carlos "Slim" Helu, came out declaring that both offers for the company are too low and that they should up the ante. Slim holds a 13.7 percent interest in MCI and has vowed to get involved if the offers don’t improve (see Slim Gets Fat on MCI Stake). There is also the issue of a $200 million breakup fee that MCI would have to pay to Verizon if it decides to accept Qwest’s offer. But that would be small potatoes if it receives an extra $1.25 billion from Qwest.

Qwest’s Toevs wouldn’t comment specifically on Slim’s statements.

Though some have suggested there may be a bidding war, Verizon has come out publicly saying it usually doesn't play ball that way (see Know When to Hold 'Em).

Qwest’s Notebaert told The Denver Post that if he fails to land MCI, that he has a “Plan B” to buy the overlapping network assets of Verizon/MCI and others, but says that the company’s focus is on “Plan A.” He told the paper his company would not file for bankruptcy if the merger plans fall through.

Equipment vendors are weighing in with their own opinions of the two deals. Thomas Mock, Ciena Corp.’s (Nasdaq: CIEN) senior VP of strategic planning believes the two deals have different motivations behind them. In Mock's veiw, Verizon sees the merger as an opportunity to get a network to connect all its local properties, as well as to get MCI’s enterprise customers. Qwest, however, would use MCI to improve its long-haul network and improve operating synergy between the two companies.

“We sell different things to all three companies,” he says. “I’d be more worried if we were doing something speculative where the company would then have to see how their new partner reacts to that.” No matter what happens to MCI, Ciena and other vendors are setting their teeth for more consolidation, especially where it relates to the area of fixed/mobile convergence, a huge growth area. “We’ve seen the first round of convergence,” Mock says. "But that’s not to say that it’s over.” — Chris Somerville, Senior Editor, Next-Generation Services

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