M&A

Qwest Withdraws from MCI Contest

The process ''seems to be permanently skewed,'' says the Denver-based telecom, which reiterates its belief ''that MCI never intended to negotiate i...
Stephen TaubMay 3, 2005

Qwest finally waved the white flag. The Denver-based telecom will not try to top the latest offer from Verizon Communications Inc. — valued at $8.5 billion — to buy MCI Inc.

MCI announced that its board of directors has “unanimously determined” that Verizon’s revised offer “is superior to the offer received from Qwest Communications International Inc. on April 21.”

In a press release, Qwest stated the company’s belief that “the decision of the MCI board to once again favor Verizon is another example of that board’s failure to accept the offer that maximizes shareowner value.” Added the press release, “It is no longer in the best interests of shareowners, customers, and employees to continue in a process that seems to be permanently skewed against Qwest.”

Per MCI share, Verizon’s revised offer works out to $26, comprising $5.60 in cash plus the greater of either 0.5743 Verizon share or stock valued at $20.40. (A previous Verizon offer totaling $23.10 had raised some hackles when Verizon paid $25.72 per share for more than 40 million shares owned by entities affiliated with MCI’s largest shareholder, Carlos Slim.)

“While MCI shareholders benefit from a ‘floor’ of $20.40, they also benefit from the upside potential of an increase in Verizon’s stock price,” MCI stated. The company added that a large number of MCI’s most important business customers preferred a transaction with Verizon rather than with Qwest.

“Additionally, as their contracts come up for renewal, a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction,” MCI added in its press release. “These customer concerns, in the Board’s view, pose risks in connection with a Qwest transaction that could negatively impact the value of the equity stake in a combined Qwest/MCI to be received by MCI’s shareholders under Qwest’s offer.”

In its statement, Qwest — which had most recently offered $30 per share, $16 in cash and $14 in stock, according to Bloomberg — angrily noted that “the declaration of ‘superiority’ for our $30 offer contained no discussion of the factors the MCI board now describes as reasons $30 is not deemed greater than $26.”

Added Qwest: “We pursued MCI with tenacity and discipline and feel strongly that our bid would have brought far more value to MCI shareholders. Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value.”

MCI, however, stressed in its press release that the offering price was not the only factor when it decided to accept Verizon’s latest bid. It pointed out that a large number of MCI’s most important business customers had indicated that they prefer a transaction between MCI and Verizon rather than a transaction between MCI and Qwest.

“Additionally, as their contracts come up for renewal, a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction,” MCI added in its statement. “These customer concerns, in the board’s view, pose risks in connection with a Qwest transaction that could negatively impact the value of the equity stake in a combined Qwest/MCI to be received by MCI’s shareholders under Qwest’s offer.”

In a related development, The Wall Street Journal, citing people familiar with the situation, reported that the Securities and Exchange Commission is looking into possible suspicious trading activity in Qwest’s stock at different points during its battle to acquire MCI.

The regulator may be focusing on trades that took place in late March, reported the Journal. During that period, added the newspaper, Qwest’s share price fell below the lowest figure at which MCI investors would receive compensation against declines in Qwest’s shares, under Qwest’s offer at the time. At the end of trading on the days in question, Qwest’s share price closed above the so-called collar, preventing an erosion of the value of Qwest’s bid, according to the paper.

A Qwest spokesman declined comment, the paper reported.