Qwest Won't Qwit on MCI

The Qwest Communications International Inc. (NYSE: Q) quest for MCI Inc. (Nasdaq: MCIP) might not be done yet.

Qwest has hired proxy firm The Altman Group in what could be an attempt to counter MCI's latest acceptance of a Verizon Communications Inc. (NYSE: VZ) takeover bid.

Yesterday, MCI agreed to be acquired by Verizon after the latter upped its purchase bid to $7.6 billion. That's still less than the $8.45 billion package Qwest had on the table, however (see And the Winner Is... Verizon!).

A Qwest spokesman confirmed the Altman Group had been hired, but Qwest is offering no further information. "There's a lot of work to be done. Ken Altman [the Altman Group's CEO] has been hired to support the Qwest investor relations team," the spokesman says.

Some of MCI's larger shareholders were reportedly unhappy with the deal, believing the company should have accepted the larger Qwest offer. But Verizon is perceived as financially more stable than Qwest, and that factor apparently took precedence in the MCI board's decision.

Qwest's options include a renewed bid for MCI or even a hostile takeover. The latter could be aided by large MCI shareholders who have expressed dismay at the smaller Verizon offer.

Qwest's first probable move, though, is to find out just how much support it's got among the MCI shareholder ranks.

"My sense is that Qwest essentially hired this proxy service to find out what the MCI shareholders think about the merger," says Daniel Zito, an analyst with Legg Mason Inc. "The first thing they will do is take an informal poll to the shareholders and ask them, ‘Should [MCI] really go down this path?' ”

MCI's "more radical" shareholders might already be talking to Qwest, Zito says. "Whether or not there is a majority of MCI shareholders that are against the Verizon merger remains to be seen."

Analysts didn't expect Qwest to just fold its hand anyway. "We believe it is possible that [Qwest] might raise its bid a third time," perhaps by $1 per share, wrote analyst Viktor Shvets of Deutsche Bank AG in a research note yesterday. That would put Qwest's bid at $27 per share compared with Verizon's $23.50 per share.

In case you've been living in a cave, Qwest and Verizon have been wrangling over MCI since early February. MCI has favored Verizon, having initially accepted Verizon's takeover bid last month, but Qwest has responded with increasingly larger offers (see Verizon Wins Tussle for MCI, Qwest Filing Details $8B MCI Bid, and Qwest Plans New Bid for MCI).

With AT&T Corp. (NYSE: T) already agreeing to be acquired by SBC Communications Inc. (NYSE: SBC), Qwest is in danger of being left out of the telecom merger party (see SBC to Buy AT&T for $16B). “We have said in the past that the acquisition of MCI is Qwest’s last single chance to dramatically remake their cost structure," says Zito. "So, having been spurned by the MCI board, they are ready to take some pretty drastic measures at this point."

— Craig Matsumoto, Senior Editor, and Mark Sullivan, Reporter, Light Reading

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