Some MCI investors oppose Verizon offer

$6.75 billion bid called `very disappointing'

Qwest deal or independence urged

February 16, 2005|By BLOOMBERG NEWS

NEW YORK - MCI Inc.'s agreement to be bought by Verizon Communications Inc. for $6.75 billion is opposed by MCI shareholders who own 10.5 percent of the telephone company and say the offer undervalues their holdings.

Three of MCI's top six shareholders - John Paulson at Paulson & Co., Bruce Berkowitz at Fairholme Capital Management LLC and Leon Cooperman at Omega Advisors Inc. - said yesterday that MCI, the No. 2 U.S. long-distance telephone company, should reconsider a higher bid from Qwest Communications International Inc. or stay independent.

The offer is "very disappointing for MCI owners," said Berkowitz, president of Short Hills, N.J.-based Fairholme, MCI's fifth-largest shareholder with a 3.5 percent stake.

New York-based Verizon is paying $20.75 a share for MCI, including $14.75 in stock, $1.50 in cash and $4.50 that comprises a special dividend and MCI's planned quarterly dividends, including a 40-cent payment approved by MCI's board Friday.

Qwest's $23 offer consists of $15.50 in stock and $7.50 in cash. Including $1.60 in dividend payments, the bid would be valued at $24.60 a share, or about $8 billion, said people familiar with Qwest's bid. Qwest's bid consisted of about $3 billion in cash, compared with Verizon's $2 billion, they said yesterday.

Also yesterday, Qwest Chief Executive Officer Richard C. Notebaert, spurned by MCI in his attempt to buy the company, said he is keeping his options open about his next move. Notebaert said he was surprised that MCI chose to accept Verizon's offer over Qwest's higher bid.

"We were a very good fit for MCI or we would not have made the proposals as strong as they were," Notebaert said in an interview. "How do you argue leaving a billion of cash? That's a lot of money to leave on the table. That's why you see some of their shareholders rolling their eyes."

A higher offer

Notebaert's comments and the opposition to Verizon's bid by the large MCI shareholders sparked optimism that Qwest might keep pushing its offer or make a higher one. That would pressure Verizon to raise its bid and could make it harder for MCI Chief Executive Officer Michael D. Capellas to win shareholder approval for the deal.

MCI directors voted over the weekend to merge with Verizon, the largest U.S. local-telephone company, rather than with Qwest, the smallest regional phone company.

A bidding war is possible, Friedman Billings Ramsey analyst Michael Bowen wrote in a note to clients yesterday. "Verizon may ultimately be required to pay a higher price for MCI than its initial offer," wrote Bowen, who rates Verizon shares "outperform."

Shares of Ashburn, Va.-based MCI rose 62 cents to $20.55 yesterday in Nasdaq stock market composite trading. On Monday, they dropped 82 cents after the transaction was announced amid disappointment that Verizon's offer included dividends that investors were promised earlier. Qwest, the biggest local-phone company in 14 Western states, rose 6 cents to $4.04 yesterday.

"Verizon is buying MCI for $14.75 of their currency and $6 of my money," said Cooperman, whose Omega fund in New York holds 2.9 percent of MCI.

Paulson, whose company is MCI's fourth-biggest holder with a 4.1 percent stake, and Cooperman said Qwest should make its offer public and press to forge a deal with MCI. Shares of MCI might have traded as high as $25 or $26 had Qwest's offer been accepted, Paulson said.

"I don't think it's all over yet, because ultimately this is going to have to be approved by MCI shareholders," said Paulson, who is based in New York. "If Qwest puts its offer forward, I think there's a good chance shareholders would prefer the Qwest alternative."

Qwest officials estimated that by meshing the company's long-distance network with MCI they could eliminate some costs and realize other benefits with a value of about $15 billion, people familiar with the matter have said. Verizon and MCI said their merger would generate $7 billion in so-called synergies.

Qwest's need to find a merger partner was underlined by the company's fourth-quarter results, reported yesterday. Qwest posted a $139 million loss as customer defections led to a 4.2 percent drop in phone lines, to 15.5 million. Sales declined 1.7 percent, to $3.44 billion.

"If Qwest has a superior offer, I urge them to come forward," Cooperman said. "We'll have to wait and see if Qwest has a bona fide offer."

Mexican billionaire Carlos Slim is MCI's largest shareholder, with 13.7 percent. The private investment firm ESL Partners LP, run by Edward Lampert, and MatlinPatterson Global Opportunities Partners LP are the second- and third-largest shareholders.

`Brighter future'

Lampert spokesman Steve Lipin said Lampert would have no comment. David Matlin, one of the founders of MatlinPatterson, didn't return a call seeking comment. Arturo Elias, Slim's spokesman, didn't return phone calls or an e-mail message seeking comment.

Capellas said Monday that MCI would have a "brighter future" with Verizon. MCI's board unanimously voted in favor of the Verizon bid, MCI director Dennis Beresford said in an interview. He declined to say why directors chose to accept a lower offer.

"This is a very, very experienced board that deliberated all the options," Capellas said. "This is the best way to get the best value. We looked at it from every conceivable way."

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