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Qwest Displays Tenacity in MCI Bid

A growing number of observers see promise in a possible deal, despite Verizon's accepted offer.

February 24, 2005|James S. Granelli | Times Staff Writer

Qwest Communications International Inc. is showing itself to be a determined suitor as it prepares a revised bid for MCI Inc. that's aimed at upending last week's pact with Verizon Communications Inc.

And a small but growing number of analysts who initially discounted Qwest say the Denver company's efforts could be a good match for MCI after all.

Qwest is tweaking its $8-billion offer of cash and stock for Ashburn, Va.-based MCI. In a new bid likely to be released today or Friday, Qwest is expected to raise the cash amount, lower the shares offered and provide some guarantee against drops in its stock price.

There is one major obstacle: MCI directors already have agreed to a lower $6.75-billion deal with Verizon, and under its terms breaking that agreement would cost $200 million.

MCI shares reached a 52-week high Wednesday, closing at $22.95, up 30 cents, on Nasdaq, as investors anticipated a bidding war.

"The emerging battle for MCI is shaping up as a battle of Qwest's willpower versus Verizon's financial power," Banc of America Securities analyst David Barden wrote. "In poker terms, Qwest has a short stack but is going 'all in,' forcing Verizon to decide how committed it really is to closing the MCI deal."

Most Wall Street analysts pooh-pooh Qwest's efforts, saying MCI would be better off with Verizon, which is bigger and stronger financially. Qwest, they believe, could go broke trying to buy and absorb MCI.

Verizon is already the nation's largest phone company -- and acquisition of MCI "will really launch it into being a mammoth competitor," said analyst Kate Gerwig at Current Analysis Inc., a Sterling, Va., telecom consulting firm.

But some are coming around to seeing things the way many of MCI's major shareholders do.

To them, Qwest would be as good a partner as Verizon, and potentially better.

They are influenced in part by the fact that Qwest is offering $1 billion more in cash than Verizon has. Most of MCI's major shareholders are short-term investors who simply want to make as much money as possible in selling the company.

But some shareholders also like the idea of holding a large stake -- as much as 40% -- in a company that they believe could pare costs more effectively than Verizon could.

The result, some think, could be a bigger percentage increase in the stock price.

"We all have a greater appetite for risk than the board had or thought we had," said Leon G. Cooperman, whose Omega Advisors Inc. in New York owns 9.3 million shares, or 3%, of MCI.

Qwest, a long-distance company before it acquired regional carrier U.S. West, has a network that is modern and efficient, although smaller than MCI's.

But its experience in long distance could help the company reorganize the more than one dozen networks that MCI cobbled together through acquisitions and never managed to combine coherently.

"A Qwest-MCI linkup makes sense, both financially and operationally," said analyst Christopher M. Larsen at Prudential Equity Group in New York.

One barrier to a deal disappeared Tuesday, when the U.S. General Services Administration, which had been investigating the company because of past accounting problems, cleared the way for Qwest to continue bidding on federal contracts. In spurning Qwest's offer on Feb. 13, MCI directors reportedly were worried about the effect of a possible ban on Qwest from federal work, which is a big business for MCI.

Hedge fund manager Elliott Associates in New York said in a letter to MCI directors Wednesday that it would vote against a merger with Verizon, as the deal now stands.

"A Qwest-MCI transaction has the potential to transform both entities," creating more value than a merger with Verizon would, wrote Elliott Associates, which owns 2.7 million shares.

The Verizon deal also has drawn fire from consumer groups.

"A Verizon-MCI merger eliminates a great deal more competition than would a Qwest-MCI deal," the Consumer Federation of America and Consumers Union, publisher of Consumer Reports magazine, wrote in a letter Wednesday to congressional leaders.

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