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.
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