Qwest bid for MCI is put at $6 billion

Verizon, BellSouth believed considering vying for ex-WorldCom

More telecom mergers expected

February 04, 2005|By Jon Van | Jon Van,CHICAGO TRIBUNE

Mergers in the telecom industry appear to be contagious.

Less than a week after AT&T Corp. agreed to be purchased by SBC Communications Inc. in a $16 billion deal, a reported offer of $6.3 billion for MCI Inc. by Qwest Communications International Inc. is seen more as a starting point than a certain deal.

In response, Verizon Communications Inc. and BellSouth Corp. were said yesterday to be looking at whether to make offers for MCI or weigh other moves, including one with Sprint Corp.

For several years, analysts preached that the telecommunications industry needed consolidation. But most of the sector hunkered down during the economic free fall after the dot-com collapse that started in 2000.

The first move came last year when Cingular Wireless, jointly owned by SBC and BellSouth, bought AT&T Wireless to create the nation's largest cell phone provider. Shortly after that deal closed, Sprint said it would buy wireless rival Nextel Communications Inc.

The telecom industry is like someone trying to get olives out of a narrow jar. Once the first olive gets out, the others follow in a rush, said Steven Titch, a telecom analyst for the nonprofit Heartland Institute in Chicago.

"SBC's move on AT&T is a validation for Qwest and MCI to leak their negotiations," Titch said.

Company spokesmen declined to comment, but analysts questioned whether MCI shareholders would be pleased with Qwest's offer unless it draws other players into a bidding war.

MCI has more cash and less debt than Qwest. Any takeover by Qwest would almost certainly require MCI shareholders to accept Qwest stock as payment, said Ben Silverman, editor of FindProfit.com.

"I don't imagine [that] investors who've sunk millions into the reorganized MCI looking for a profit would be happy to take a lot of Qwest paper in return for their investment," he said.

Like AT&T, MCI has seen profits from its long-distance business shrink since the regional phone companies began offering the service a few years ago. MCI's main assets are its Internet backbone and its roster of big business and government agencies as network customers.

Despite years of trying, the Bells have made slow progress cracking the large enterprise market. SBC's acquisition of AT&T will propel it into first place in that segment.

Analysts say that Verizon and BellSouth are assessing whether they need to buy MCI as a countermeasure.

Since emerging from the WorldCom bankruptcy and changing its name back to MCI, the company has been grooming itself as a takeover candidate. One ploy occurred last year, when Leucadia National Corp., a low-profile investment firm, bought about 5 percent of MCI stock and said it might acquire up to 50 percent. Later in the year Leucadia sold its holdings at a profit.

"Leucadia was a trial balloon for MCI," said Rich Nespola, chief of TMNG, a technology consultancy.

Qwest's offer has more credibility, he said, and is a gutsy play by Richard Notebaert, Qwest's chief executive.

"It's a smart move by Notebaert," Nespola said.

But because a Qwest/MCI pairing would lack a wireless component, it would fall short of exploiting MCI's enterprise customer base, said Andy Belt, senior vice president with Boston consultancy Adventis.

Selling wireless products to businesses would be the attraction for Verizon or BellSouth to buy MCI, Belt said. Both Verizon and BellSouth have significant stakes in wireless companies.

"An MCI/Qwest hookup doesn't look like a long-term, stable surviving player," he said. "It could be an interim step along the road to another deal."

Whatever happens to MCI, analysts agree that telecom consolidation is under way and will likely accelerate. Other phone companies such as Sprint may be involved in talks, either as a an acquirer or target.

Cable TV operations such as Comcast Cable Communications Inc. might enter the fray.

"The big face-off that's coming will be between large cable companies and big telecoms," said Alex Liu, a vice president at consultant A.T. Kearney Inc. "Cable companies may partner with a wireless carrier in the short term, but in the longer term, they need to buy a wireless carrier to fully integrate it into their network."

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