Verizon Wins Tussle for MCI

After a weekend of reported bids and counterbids, Verizon Communications Inc. (NYSE: VZ) has beaten off fellow RBOC Qwest Communications International Inc. (NYSE: Q) in the race to buy MCI Inc. with a deal worth $6.75 billion (see Verizon to Buy MCI in $6.7B Deal).

The deal concludes a frantic few weeks during which Verizon and Qwest battled over the long-distance operator following SBC Communications Inc.'s (NYSE: SBC) deal to buy AT&T Corp. (NYSE: T). (See Report: Verizon Close to MCI Deal, Qwest Wants MCI, Says Report, and SBC to Buy AT&T for $16B.)

Media reports over the weekend said Qwest had increased its original $6.3 billion bid to $7.3 billion in stock and cash (about $23 for each MCI share), forcing Verizon to adjust its offer, but not top the value of the Qwest deal.

The final deal, agreed to by both boards, sees MCI shareholders receiving:

  • $4.795 billion in stock -- 0.4062 Verizon shares for each MCI share, equivalent to $14.75 per MCI share based on the $36.31 closing price of Verizon's stock on Friday.
  • $488 million in cash -- MCI shareholders will get $1.50 for each share (subject to amendment).
  • $1.463 billion in quarterly and special dividends -- including a 40 cents per share quarterly dividend approved by the MCI board last Friday.
In total, the package is worth $6.746 billion, or $20.75 per MCI share. MCI stock closed at exactly that price on Friday.

That valuation shows how much MCI's fortunes have changed in the past five years. The carrier, formerly known as WorldCom, was worth about $180 billion before the telecom bubble burst and the operator's accounting scandal came to light (see WorldCom Restatements Top $9B). Former WorldCom CEO Bernie Ebbers is currently in court charged with fraud.

In its statement announcing the deal, Verizon says the deal creates an operator with the "financial strength to maintain and improve MCI's Internet backbone network." Industry analysts and commentators believed MCI would favor a Verizon deal ahead of a Qwest offer because of the former's greater fiscal size and strength, and because Qwest has more than $17 billion in debt, a sum greater than its annual revenues.

In a prepared statement, Verizon CEO Ivan Seidenberg said the deal comes as MCI "is gaining momentum. It is a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies. This acquisition builds on and accelerates Verizon's growth plan in the Enterprise market, and it facilitates our becoming a major provider in that market sooner and less expensively than if we had continued on a path of organic growth."

Seidenberg also said that with the two carriers' "operational resources and investment capacity, we plan to drive efficiencies, increase cash flow and pursue new revenue opportunities."

Verizon plans to cut 7,000 jobs at MCI as part of its efficiency drive.

But MCI's preliminary fourth-quarter results issued today show little momentum. The $5 billion revenues show a fall in sales on a sequential and year-on-year basis (see MCI Reports Shrinking Sales). In addition, MCI has a notoriously complex back-office setup (see MCI in OSS Chaos).

However, Verizon expects the acquisition to yield a net value of $7 billion in revenues and operational savings.

Verizon will take on MCI's net debt of about $4 billion. The deal needs approval by regulatory bodies and MCI shareholders. Verizon believes the approval process could take up to a year, and says issues such as branding and management structure will be concluded as the deal moves towards closure.

Verizon expects the acquisition to have a 10 cents per share dilutive impact on its earnings per share (excluding acquisition and amortization costs) in the first year after the deal is closed. The RBOC expects positive cashflow from the deal in the third year.

With SBC and Verizon now having found long-distance partners, attention will likely turn to Qwest's ongoing options, and the expansion plans of fellow RBOC BellSouth Corp. (NYSE: BLS), which has kept itself out of the M&A fray (see BellSouth at a Crossroads).

With AT&T and MCI spoken for, that leaves Sprint Corp. (NYSE: FON) and, to a much lesser extent, Level 3 Communications Inc. (Nasdaq: LVLT), as the unmatched long-distance players, though Sprint's position is complicated by its current agreement to acquire Nextel Communications Inc. (Nasdaq: NXTL). (See Sprint, Nextel Confirm Merger.)

— Ray Le Maistre, International News Editor, Light Reading

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