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March 29, 2005

MCI rejects Qwest again and opts for Verizon, again

Long-distance telephone company MCI has accepted a sweetened takeover offer from regional phone giant Verizon Communications, over a competing bid from Qwest Communications International.

By CBR Staff Writer

After a review of both proposals MCI’s Board of Directors accepted Verizon’s revised offer, MCI said in a statement yesterday.

It was back in mid February when MCI signed a $6.75bn agreement to be acquired by Verizon, but Qwest, which saw its higher bid of $8bn ignored by MCI’s board, conducted a vigorous campaign to get MCI to change its mind.

MCI’s board was concerned about Qwest’s $17bn debt pile, its balance sheet, and the fact that its shares were less attractive than those of New York-based Verizon. Indeed, at the end of 2004, Qwest had nearly $16.69bn of long-term debts and just $1.77bn in cash and liquid assets. The carrier lost $1.79bn for the year as revenues fell 3.4% to $13.81bn.

By contrast Verizon ended 2004 with long-term debts of $37.67bn and just $4.55bn of liquidity, but its business generated $71.28bn of revenue, net income of $7.83bn, and $21.82bn of cash.

Despite being in a much weaker financial and market position, Qwest did not give up and managed to successfully encourage MCI shareholders to force the MCI board to re-open negotiations with Qwest.

During the past couple of weeks, Denver, Colorado-based Qwest has twice sweetened its offer for the carrier, increasing its bid to $8.45bn.

Last week, Verizon gave its permission (again) for Ashburn, Virginia-based MCI to continue talks with Qwest over its sweetened offer. Qwest in turn demanded a MCI response by April 5 to its renewed offer.

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Now Verizon has upped its cash-and-stock offer to $23.50 a share, adding more cash to its bid and including protection against a decline in its stock price. The new deal is now said to be worth $7.6bn.

However, this sweetened deal is still below the $8.45bn being offered by Qwest, and it is by no means certain that MCI shareholders will approve of the board’s decision to again opt for the lower bid.

Most of MCI shareholders seem to be of the mind that the highest bid should win, and it is clear that Qwest’s deal offers more financially speaking, although its claims of greater synergies than a merger with Verizon have been rubbished by Verizon.

Essentially, Qwest has argued that its deal will generate more than twice as much savings as Verizon has promised, and that a Qwest-MCI deal would raise fewer objections from government officials concerned about lost competition. The savings include up to 15,000 job cuts, or more than twice as many as Verizon plans.

Last week Verizon’s chairman and chief executive Ivan Seidenberg took the opportunity to rubbish those savings claims, and said his company would not be distracted by Qwest’s histrionics, false statements and grossly exaggerated synergy claims.

Shares of Qwest fell 1.8% to $3.68 as of Tuesday 5pm GMT on the New York Stock Exchange. Verizon’s stock rose 1.8% to $35.35, while MCI’s stock on Nasdaq rose 3.5% to $23.76.

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