After the long-distance telephone carrier accepted a sweetened $7.6bn bid from Verizon, spurned bidder Qwest, as widely expected, increased its bid Thursday to $8.9bn, in another attempt to derail the deal.
MCI said it will re-engage with Qwest to review Qwest’s March 31, 2005 proposal to acquire the company, and added that it has received a waiver from Verizon enabling it to engage in discussions with Qwest at any time until the date of the MCI shareholder vote on the proposed Verizon transaction.
Qwest continues to play hard-ball, issued a scathing statement suggesting MCI’s board of directors may be breaching their fiduciary duty (something of a sore topic at the former WorldCom) by declining Qwest’s bigger offer.
We urge the MCI Board to cease its favoritism, stop attempting to tilt the regulatory playing field and run a fair, transparent, complete and timely sales process, Qwest said. Only such an auction is consistent with the MCI Board’s execution of its fiduciary responsibilities.
Over the past six weeks Qwest has increased its offer from $8bn, to $8.45bn and now up to $8.9bn, about half of which is cash. It is offering MCI shareholders $27.50 a share, including $13.50 in cash and stock valued at $14. It has doubled the collar, a buffer that protects MCI investors if Qwest’s stock drops.
Late last week, Qwest clearly signaled its intent to pursue MCI, despite it accepting (for the second time) a takeover bid from Verizon. Qwest hired New York-based the Altman Group, which specializes in building shareholder support for hostile takeovers. It is understood that Verizon has also hired its own proxy consulting firm, as it prepares to fight Qwest if it launches a hostile takeover battle.
Qwest’s new offer is now 19% more than Verizon’s latest offer, and will provide yet more ammunition to MCI shareholders, who are getting increasingly vocal about the decision of MCI’s board to continually opt for a lesser value bid from Verizon.
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In consistently opting for Verizon over Qwest, the MCI board has said it felt the need to look beyond the immediate dollar value of the deal and consider things like strength of the partner. Verizon is worth a staggering $98bn, but has long-term debts of $37.67bn and just $4.55bn of liquidity. However, by the end of 2004 its business had generated $71.28bn of revenue, net income of $7.83bn, and $21.82bn of cash.
Qwest on the other hand is nearly $16.69bn in debt and is worth a partly $7bn. It has just $1.77bn in cash and liquid assets, but lost $1.79bn in 2004 as revenues fell 3.4% to $13.81bn.
Yet this has not put off MCI shareholders, who have consistently criticized MCI’s board for opting for the lesser value offer from Verizon. Indeed, shareholders that control 26% of MCI’s stock (including four of the five largest investors), have gone on record and expressed unhappiness with the board’s decision to accept a previous lower bid from Verizon.
The most recent published criticisms of MCI’s board has come from New York-based hedge fund Kellner, DiLeo Cohen and Co, Fairholme Capital, an investment firm that owns a 3.5% stake in MCI, and Paulson & Co, which owns 3.8% of MCI’s shares.
Qwest said: We note with interest that some of MCI’s largest shareholders consider our offer to be superior. We believe that any attempt to deny shareholders the value we are offering is a dereliction of fiduciary duty on the part of the MCI’s Board.
A number of MCI’s shareholders are short-term investors more interested in the dollar value of the rival bids rather than other issues the board has to factor in, like future cost savings and long-term investment in MCI’s network. Qwest has estimated it could save $14.7bn by acquiring MCI, more than twice the savings that Verizon claims it would gain from the deal.
In a letter sent to MCI’s chairman last week, Qwest CEO Richard Notebaert accused MCI’s board of a complete abdication of its duties in accepting Verizon’s bid without giving Qwest an opportunity to increase its own offer, as Notebaert says Qwest had previously requested.
While talk of a hostile takeover battle is all very entertaining, some are questioning whether Qwest has the financial strength and stamina to succeed. In the end, it may well come down to which company’s share price is more valuable. There is little doubt that Qwest’s share price would be more affected by, for example, interest rate rises or the price of oil, than that of more financially stable companies such as Verizon.
Shares in MCI rose 1% to $25.15 on Nasdaq, as of 4pm GMT Friday. Shares in Verizon rose 0.2% to $35.60 on the New York Stock Exchange. Shares in Qwest rose 1% to $3.66.
