M&A

Verizon to Buy MCI for Nearly $7 Billion

One-time long-distance leaders AT&T and MCI will now both be controlled by Baby Bells.
Stephen TaubFebruary 14, 2005

Verizon Communications Inc., the nation’s largest telecommunications company, has agreed to acquire MCI Inc. in a deal valued at $6.746 billion.

Though Verizon underbid rival Quest Communications by more than a half-billion dollars, Qwest was widely deemed to be the weaker suitor due to its high debt and low share price.

Coupled with SBC Communications Inc.’s agreement to buy AT&T Corp. for $16 billion, one-time long-distance leaders AT&T and MCI will now both be controlled by former Baby Bells. Other recent deals in the rapidly consolidating industry, noted The New York Times, include December’s Sprint-Nextel merger agreement that formed the third-largest wireless company and the subsequently announced acquisition of Western Wireless by Alltel, a regional cellular provider.

Under the newly announced agreement, MCI shareowners will receive $4.795 billion in equity ($14.75 per MCI share, based on Verizon’s Friday closing price) and $488 million in cash ($1.50 per share). The cash consideration is subject to adjustment at closing and may be decreased based on MCI’s bankruptcy claims-related experience.

In addition, MCI will pay its shareholders quarterly and special dividends of $4.50 per share, worth $1.463 billion. This includes a 40-cent-per-share quarterly dividend approved by the company’s board on Friday.

After allowing for cash on hand, Verizon will also assume about $4 billion in MCI’s net debt.

The companies said they expect regulatory approvals to take about a year.

According to the announcement, in the first year following the deal’s closing, Verizon expects its earnings per share to be diluted by about a dime, excluding acquisition costs and any amortization of intangible assets that may be created at the time of the acquisition. The company added that it expects the transaction to be essentially breakeven in year three and that cash flow will turn positive in year three.