Legg's Bill Miller has become active player in Qwest's battle for MCI

He was key to raising offer to $30 a share

April 23, 2005|By William Patalon III | William Patalon III,SUN STAFF

Taking on a new role, Legg Mason fund manager William H. Miller III has become an active player in the bidding war for MCI Inc., putting up undisclosed millions to back Qwest Communications International's beefed-up bid for the long-distance company.

Legg Mason confirmed yesterday that under Miller's direction it had joined other large stakeholders who are putting money on the table in the battle for MCI. But Legg said it could not release details of Miller's financing plan. Miller's office did not return telephone calls seeking comment.

An analyst at mutual fund tracking company Morningstar Inc. said that Miller's direct involvement in the bidding war appeared to be a new step for the superstar money manager, who has publicly demanded that MCI's board accept Qwest's bid over a lower one from rival suitor Verizon Communications Inc.

"I think it's great," said Christopher Traulsen, who has followed Legg Mason and Miller for several years. "He's been vocal about corporate governance issues, but I don't recall him ever before taking such an active role in such a high-profile [situation]. But I do think it's great. Fund managers have a fiduciary responsibility to make as much money as possible for their shareholders."

In mid-2002, Legg Mason, under Miller's direction, became a direct investor when it teamed with billionaire Warren E. Buffett and another firm to invest $500 million in Level 3 Communications Inc. so the Colorado technology firm could buy bargain assets after the telecom sector collapsed. But that was more of an alliance - "friends all around" - Traulsen said, rather than a hostile battle.

Miller, New York hedge fund manager Leon G. Cooperman and possibly other MCI shareholders who together own more than 13 percent of MCI's outstanding shares have agreed to ante up $800 million so that Qwest could boost its bid for the long-distance company. Qwest raised its cash-and-stock offer Thursday by $2.50 a share to $30, or $9.75 billion. It marked the third time Qwest has increased its bid.

Qwest said it would withdraw its offer as of 5 p.m. today if MCI's board of directors did not decide the Qwest bid was "superior" to the Verizon proposal it has already accepted.

Analysts say Verizon will likely have to boost its current offer of $7.5 billion in cash and stock, or risk losing MCI.

Shares of MCI rose 19 cents yesterday to $26.29. Qwest shares lost 6 cents to $3.55, and Verizon dropped 20 cents to $34.06.

Through Miller, Legg has stakes in both firms. It held 5.6 million shares of MCI at year-end. That was dwarfed by its 240 million Qwest shares, making the Baltimore investment firm one of the largest investors in the debt-ridden company. Qwest views MCI's $2 billion in yearly cash flow as a lifeline.

Qwest had $16.7 billion in long-term debt as of December, compared with a current market valuation of only about $6.45 billion, according to Bloomberg News.

MCI has pointed to Qwest's shaky finances as the reason for choosing Verizon's lower bid, a cash-and-stock deal amounting to $23.10 per share. Verizon has twice as much debt, but its market value of more than $94 billion is more than 14 times that of Qwest, according to Bloomberg financial statistics. New York-based Verizon also has the nation's largest local phone service and its second-largest wireless company.

"We still feel good about our offer, and feel good about our prospects," said Eric Rabe, a vice president of media relations for Verizon. "A combined Verizon-MCI makes sense. We'll have to wait and see what MCI's board has to say."

Verizon also angered Miller and other investors two weeks ago when it cut a side deal with Mexican telecom tycoon Carlos Slim, buying his 13-percent-plus stake in MCI to bolster its position in the bidding battle.

Verizon agreed to pay $25.72 per share for Slim's 43.4 million MCI shares, or $2.62 per share more than it was offering the remaining investors. That deal apparently cemented Miller's decision to back financial assistance to a larger Qwest bid.

Even with today's 5 p.m. deadline, there's "nothing to stop Qwest from offering more money [meaning that] Verizon will almost certainly look to boost its bid," said Ivan Feinseth, an analyst who follows all three of the telecommunications companies for Matrix USA in New York.

Feinseth said he has financial relationships with none of the companies.

Feinseth and other experts say the moves being made by the MCI shareholders are more about maximizing the value of their own holdings than they are a stance on fiduciary responsibility or other such lofty corporate governance matters.

"No matter what happens [going forward], it's a win-win for shareholders," said Bruce Allen, founder of Bruce G. Allen Investments in Denver. "Tell Bill Miller to keep up the good fight. He's helping everybody."

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