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Slim's Pickins

Please, can somebody just close the deal?

Over the weekend Verizon Communications Inc. (NYSE: VZ) revealed that it is buying out Mexican billionaire Carlos Slim Helu’s 43.4 million shares of MCI Inc. (Nasdaq: MCIP), a 13.7 percent stake in the company, for $25.72. That’s 11 percent more than the $23.50 Verizon last offered to all MCI shareholders.

Yes, there’s only one problem: Slim's less-than-slim share still isn’t the entire company. Verizon still has another 86.3 percent of stock to go (or technically, 37.3 percent if it just wants a simple majority).

For those of you who haven’t followed this story (and I don’t blame you if you’ve tuned out), last week Verizon said it will refuse to match Qwest Communications International Inc.'s (NYSE: Q) monetarily superior offer of $8.9 billion, or $27.50 per share for MCI (see Verizon to MCI: Choose Us or Lose Us and Qwest Responds to MCI). After paying Slim off for $25.72, Verizon is saying, $23.50 will have to do the rest of you just fine.

MCI’s board so far has said it is favoring Verizon’s offer (see MCI Spurns Qwest Again). The general idea behind MCI’s logic, as far as I can understand it, is something like this: “Verizon’s bigger, and Qwest’s stock stinks.”

In a statement issued on Monday, MCI said: "Verizon's agreement to purchase approximately 43.4 million shares from entities affiliated with Mr. Slim is a private transaction between those two parties. Nevertheless, MCI's Board of Directors remains committed to obtaining the transaction that is in the best interests of all of its shareholders."

MCI also said Monday that it won't change provisions in its "poison pill," which prohibits one holder from accumulating more than 15 percent of the company's stock:

"Accordingly, MCI's Board of Directors has no intention of amending its Rights Agreement to permit accumulations of the Company's stock in excess of the current 15 percent limit other than pursuant to its previously announced merger agreement with Verizon or an alternative merger transaction which the Board determines is in the best interest of its shareholders."

Verizon’s latest chess move takes out Slim, who was perceived to be MCI’s strongest shareholder. Slim, who bought his stake in MCI as it was coming out of bankruptcy, stands to make about a half billion dollars on what is turning out to be a very savvy bet (see Slim Gets Fat on MCI Stake). Now, with his private deal with Verizon, he’s ending up with an earlier exit – at a more attractive price – than the rest of the MCI shareholders.

Bravo, Carlos. I guess this is why you became what Forbes calls the fourth richest man in the world.

As for Verizon, some people seemed to cheer this move, apparently viewing it as corporate gamesmanship. But doesn’t the whole thing just feel a little bit oily? Verizon’s saying that some shares in MCI are, for some reason, worth more than anybody else’s shares. That’s just not right.

Will MCI shareholders agree? If I were part of the shareholder base, I’d be furious. You’ve just watched one of your peers get a cut out of the deal at a higher price, even though he held the same piece of paper.

At least one major MCI shareholder, Bill Miller of Legg Mason, sees the absurdity of the situation. In a letter to the MCI board released on Saturday, Miller wrote:

    As I indicated in my letter to the Board last week, events had made Verizon's $23.50 offer moot; this subsequent development confirms that. There can be no reason for the Board to support an offer to MCI owners that is substantially inferior to what Verizon has just agreed to pay for a non-control block of stock.

    Shareholders would be outraged if the Board did less than insist that the identical terms be made available to all other owners.
Miller's got some very good points.

I’d be very surprised if the courts don’t end up getting involved. I’d be even more surprised if Verizon doesn’t end up having to raise its bid to Slim’s level. The MCI board owes it to shareholders to get the same price for every piece of the common stock. If you are on the MCI board, can you, in clear conscience, allow the deal to go through with stock going to the same bidder at different prices?

In the end, this is a sad commentary on the industry. After all, Verizon, Qwest, and MCI can’t even properly execute a simple bidding war.

It’s also not helping us get to the answer of the question of what will happen to MCI any faster. Will pigs mating create, in the end, more pigs?

Verizon’s vision for its merger with MCI (see Verizon's 'Beachfront Property'), as far as I can tell, has been that “enterprise doesn’t suck as bad as the rest of the telecom world,” or, alternatively, “SBC did it first.” Qwest’s vision? “We can’t afford not to do it.”

Other than stuffing lawyers’ and bankers’ pockets and driving business journalists crazy, where’s the value in this merger? It's starting to feel like a grand waste of time. Unless you're Carlos Slim.

— R. Scott Raynovich, US Editor, Light Reading

deauxfaux 12/5/2012 | 3:19:27 AM
re: Slim's Pickins "If you are on the MCI board, can you, in clear conscience, sell the same stock to the same bidder at different prices?

As I read this, "Slim" sold his shares all by himself in a private sale. The board had nothing to do with it, and may very well have opposed the sale. But the board can't control buyers and sellers of publicly traded stock.

This may be even a shrewder move on VZs part than you think. Now that they are a major shareholder, they can pressure the MCI board to get the lower price deal done because Qwest's currency has nowhere near the stability of VZs.

VZ may be better off continuing to negotiate with individual (instituational) shareholders, rather than raise the price to all deals.

It is a great idea, if it works.
Scott Raynovich 12/5/2012 | 3:19:24 AM
re: Slim's Pickins Right, I understand. I've adjusted the imprecise wording which may have caused some misunderstanding.

The point isn't, "Can Verizon do this?" The point is, "Is it right to allow the deal to go through at a lower price."

The MCI board's fiduciary duty is to get the highest price for their stock. A major investor has just sold the stock at a 10% premium -- in, as you pointed out, a private deal.

This serves to prove the exact point -- they're not getting the highest price for their stock!

--Scott
DPD 12/5/2012 | 3:19:24 AM
re: Slim's Pickins they're not getting the highest price for their stock!

It's not always about the price per share in a mega-deal like this one, but rather it's about value.

The Qwest offer is essentially a cash deal because of the outlook on their stock. They do not have the resources to take on the MSO's. Therefore, the long term (another foreign term for tech investors) prospects for Qwest are not that bright.

On the other hand, VZ is poised to become one the largest MSO's, yes I said MSO, in the Americas. They are laying more fiber than anyone else and are also working on video. They will be a quadruple play provider sooner than any other RBOC. Therefore, their stock has tremendous value.

paolo.franzoi 12/5/2012 | 3:19:23 AM
re: Slim's Pickins
Scott,

Another way of looking at it might be from a Verizon shareholder viewpoint. They just overpaid for a portion of MCI stock. Interesting decision of the Verizon board. My guess is Carlos Slim told them that he would vote against them if they did not pay a premium. If I was a big institution, I would do the same thing. Given the 15% poison pill, I would be all over Verizon like white on rice to get my extra price.

So, is the next deal (after Sprint-Nextel closes) a simultaneous spin off of Sprint LTD and a Sprint-Comcast merger?

seven


spelurker 12/5/2012 | 3:19:21 AM
re: Slim's Pickins I was originally looking at this as the other posters were, but the more I think about it, the more I gotta say the MCI BOD has some thinking to do.

Each member of the BOD represents -- in addition to the stockholders as a whole -- one specific large investor.
If I'm on the board because Legg Mason owns billions of $$ of MCI shares, then I am responsible to Legg Mason to do whatever is in Legg Mason's best interest. In this case, my duty would probably be to get a 10% premium for my shares. If the difference between Verizon's "walk away" fee and the 10% is negative, I might suggest walking away from the deal and making VZ pony up the extra 10%.

The risk is that the deal falls through, but the BOD must have some faith in MCI's future as a standalone entity or else it would have closed the deal more quickly.

Certainly the Slim deal is legal, probably perfectly ethical, and I can see reasons a competant takeover company would do it, but it also smells like a hostile takeover. I suspect it might actually be a defense against a hostile takeover. If Qwest continues to make noise and wave money around, VZ probably wants to have the shares/votes to block Qwest.
Best case for VZ: the deal goes through at 1.3% more than their original offer. Likelihood=high
Worst case for VZ: Qwest makes a successful hostile bid converting VZ's shares at a premium, and VZ makes $$ on those shares. Likelihood=low
BlueWater66 12/5/2012 | 3:19:14 AM
re: Slim's Pickins As a "shareholder" Verizon can't directly influence the board for or against the Verizon deal or the Qwest deal. They are conflicted.

If Verizon ends up with a board seat, they'll abstain from any votes.

Shareholder litigation is a serious issue. Verizon and the BOD are an obvious targets if this new 13% shareholder participates directly in the process, because it will always appear as if they are self dealing rather than looking for the best value for all MCI shareholders.

But- by buying the shares, they've turned a potential "no" vote/voice into an "abstain". I'm sure Slim discussed that with them!
paolo.franzoi 12/5/2012 | 3:19:13 AM
re: Slim's Pickins
Well, it seems highly unlikely that a board seat would be created and filled by a Verizon person during this timeframe.

First, a BoD seat would need to be created or a current BoD member would have to resign. Then, a Verizon employee would need to be selected as a BoD candidate. Finally, the shareholder base would have to vote on this candidate. This private stock transaction does not create an opportunity to change board membership.

Now, if you were a random shareholder would you vote for Verizon to be a BoD member? Probably not. The institutions that favor Verizon might and Verizon might get a seat.

I would think that such actions would create concerns in the SEC on the BoD having an independent view of the transaction. This might make the registration process and proxy review receive significantly more scrutiny.

seven
deauxfaux 12/5/2012 | 3:19:13 AM
re: Slim's Pickins Blue

You are wrong on this one. VZ is conflicted, but the MCI board has a fiductiary resposibility to VZ as well as the rest of its shareholders. They cannot decide to "not listen" to any shareholder.

However, VZ does not have a fiduciary responsibility to all shareholders UNTIL it takes a board seat.
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