Proxy war looms after MCI selects Verizon 3rd time

Qwest balks at request to raise bid to $30 a share

Battle could shift to courts

Rival offer is 20% more than the one accepted

April 07, 2005|By Jon Van | Jon Van,CHICAGO TRIBUNE

A proxy fight could be the next battle in the war for long-distance carrier MCI Inc.

Yesterday, MCI's board accepted - for the third time - a purchase offer from Verizon Communications Inc. That sent MCI shares higher as Wall Street figured that rival bidder Qwest Communications International Inc. would not go away quietly.

The Verizon deal, which values MCI at $23.50 a share, is about 20 percent below the latest Qwest offer rejected by MCI's board. MCI's closing share price was $25.39, a rise of 38 cents for the day, suggesting that the market expects further developments.

Qwest valued its offer at $27.50 a share, but MCI's board continued to say that uncertainties about Qwest's financial position and the likelihood of closing the deal made Verizon's offer more attractive.

Tuesday night, before MCI's deadline for a higher bid, Qwest Chief Executive Officer Richard C. Notebaert balked at a request from MCI directors to increase his offer to $30, people familiar with the matter told Bloomberg News.

Qwest's offer "as a whole is not superior" to Verizon's bid of $7.51 billion, MCI said yesterday.

The MCI board said yesterday that it is open to further discussions, and it reportedly suggested again that an offer of $30 a share would win favor.

"Rather than add another $800 million or so, it appears Qwest will take its current offer to MCI shareholders," said Michael Weaver, Chicago-based managing director for Fitch Ratings. "I think that's what Verizon wants as well. I don't think either company wants to bid again."

Verizon threat

If MCI's board deemed Qwest's bid superior, Verizon said, it would walk away rather than participate in a bidding war. Verizon sweetened the original deal once by adding almost half a billion dollars to its offer.

MCI has rebuffed Qwest in favor of Verizon three times in seven weeks.

MCI CEO Michael D. Capellas, 50, says pairing with the No. 1 regional phone company - with a market value of $98.4 billion and 2004 sales of $71.3 billion - will make Verizon more alluring to large business customers. Qwest, with sales of $13.8 billion last year, has a market value of $6.87 billion.

Adding MCI's 140-nation network and its contracts with large corporations would help Verizon keep up with SBC Communications Inc., which will be the largest U.S. phone company after its $16 billion purchase of AT&T Corp.

Qwest, which has hired a company that specializes in building investor support for hostile takeovers, said it is "weighing its options, and shareholders will dictate the next steps in this process."

New York-based Verizon also has retained advisers to collect shareholder votes.

Notebaert has refused to walk away from MCI since the latter company's board first opted to be purchased by Verizon in February.

A Qwest-MCI union would enable Notebaert to save money by shedding up to 15,000 jobs and would shore up Qwest's balance sheet, which carries more than $17 billion in debt.

A proxy fight would cost Qwest $50 million to $100 million and would be a difficult undertaking, said Jim Andrew, a vice president with Adventis, a Boston consultancy.

"A number of shareholders have expressed preference for Qwest's bid," said Andrew. "It's not impossible for Notebaert to win."

Grounds to sue

There are options beyond a proxy fight, said Michael A. Nemeroff, an attorney with the Chicago firm Vedder, Price, Kaufman & Kammholz PC. A lawsuit filed by MCI shareholders could allege that the company's board failed to carry out proper fiduciary duties to maximize shareholder value, he said.

"An MCI shareholder suit could seek to enjoin the merger with Verizon," Nemeroff said. "Qwest has plenty of time to make its move. You could bring a lawsuit anytime before the deal closes."

Shareholders could take matters into their own hands. Under MCI's bylaws, a majority of stockholders can force the board to take specific actions or to call a special meeting of shareholders at which the directors could be replaced, Banc of America Securities analyst David Barden said in a research note yesterday.

In any hostile approach, Qwest also would have to contend with a so-called poison pill that triggers the issuance of MCI stock if an unwanted suitor acquires more than a 15 percent stake. The added shares would make MCI more expensive.

The Chicago Tribune is a Tribune Publishing newspaper. Bloomberg News contributed to this article.

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