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April 12, 2005

Shockwaves continue following Verizon slim deal

The shockwaves continue to be felt following Verizon Communications's controversial weekend deal with MCI's largest shareholder, Carlos Slim Helu. Indeed, the deal drew a decidedly cool response from MCI's board of directors.

By CBR Staff Writer

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.

It is perhaps something of an understatement to say that Verizon caused outrage among the rest of MCI shareholders (and of course rival bidder Qwest Communications International), after privately negotiating a special deal to pay $1.1bn for Slim’s 13.4% MCI stake. Slim is a Mexican billionaire and the world’s fourth richest man.

Verizon’s private deal with Slim translates to $25.72 in cash for each of his 43.4 million shares. MCI shareholders are only slated to receive $23.10 a share in cash and stock in Verizon’s official bid for MCI.

MCI is no doubt aware that Verizon’s special deal with Slim puts it in a tricky position, as it has consistently backed Verizon’s approaches over Qwest. MCI knows that under corporate law in Delaware (where MCI is incorporated), a company is supposed to maximize value for all shareholders in a merger or acquisition. A lengthly legal challenge could result if the company is seen as favoring some shareholders over others.

One solution would be for Verizon to increase its $7.51bn takeover bid to match what it has paid Slim for his stake. While Verizon is thought to be willing to raise the offer, it is not thought to be willing to increase the offer to match what it has paid Slim. This means that MCI’s board would have to recommend to its shareholders in effect a two tier offer where the bulk of MCI shareholders have to accept a bid lower than a special bid made to a particular shareholder. This is a recipe for things to get very messy indeed.

However, this has not deterred Verizon, which has now registered slightly more than 132 million common shares at a maximum price of $25.13 each in its S-4 filing with the Securities and Exchange Commission (the $25.13 figure is the average trading price of MCI over the past five days and does not reflect how much Verizon plans to pay for MCI).

The federal filing also included a shareholder proposal urging MCI holders to approve the $23.10 a share merger, although a vote date hadn’t been determined.

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Qwest meanwhile continues to make noises that it will not give up. A $1bn private-equity funding deal from a group of investment outfits is on the cards, which would enable Qwest to raise the cash portion of its $8.9bn offer.

Shares in Qwest fell 0.5% on the New York Stock Exchange to $3.80 as of 6pm BST on Tuesday. Verizon was also down 0.4% to $34.74, while shares in MCI rose 0.2% to $26.07 on Nasdaq.

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