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MCI says yes to Verizon

Tue, 03/29/2005 - 7:00pm
Peter J. Howe

Copyright 2005 Globe Newspaper Company

The Boston Globe

March 30, 2005, Wednesday THIRD EDITION

Choosing a richer husband over a bigger dowry, MCI Inc. yesterday accepted a $7.6 billion takeover from Verizon Communications Inc., despite repeated wooing and $800 million more offered by financially shaky Qwest Communications International Inc.

Egged on by some top MCI investors seeking a richer payout, Qwest may yet bid higher for MCI. But MCI, which as WorldCom went through a painful bankruptcy reorganization after an $11 billion accounting fraud, reiterated yesterday that hooking up with a big, stable Verizon was more valuable to shareholders over the long term than getting top dollar now from Qwest, the weakest of the four Baby Bell carriers.

The Verizon bid comes weeks after SBC Communications Inc.'s $15 billion takeover bid for AT&T and Sprint Corp.'s proposed $36 billion merger with Nextel Communications Inc. Taken together, the deals indicate the long-awaited shakeout in the U.S. telecommunications industry will leave three giants standing: SBC and Verizon, each owning either the biggest or second-biggest U.S. local, wireless, and long-distance carrier, and Sprint Nextel.

Sprint Nextel would rank number three in wireless, and lag far behind as a stand-alone long-distance and business telecom service provider. But Sprint Nextel will likely play a huge role as the preferred wholesale and wireless service provider for cable television giants like Comcast Corp. and Time Warner Inc. that are moving into adding Internet phone service to their television-Internet service bundles. In fact, both cable companies have already begun lining up Sprint for network service.

As both cable and phone companies move toward being able to offer a bundle of TV, Internet, and all-distance phone and wireless service, cable carriers are not expected to go to the wireless divisions of Verizon or SBC for cellphone service. Nor will Verizon or SBC have much interest in selling to the archrival companies trying to invade their core local phone business. That leaves Sprint, half-again bigger than the other surviving national cellphone carrier, T-Mobile USA, as the most likely candidate to partner with cable.

"It's kind of like you're going back to 1985 when the world was three main providers, AT&T, MCI, and Sprint, only now two out of the three have new names," said Judy Reed Smith, president of Atlantic-ACM, a Boston telecommunications consulting firm. "Having three kept them honest."

Bryan Van Dussen, a senior telecommunications analyst with The Yankee Group in Boston, agreed that with AT&T and MCI pairing off with the two biggest Baby Bells, "there's a modest potential vacuum starting to emerge. Business customers like to have more than two choices when they go out to bid for services."

Consumers, who have already defected in droves from AT&T and MCI long-distance service to the all-distance bundles that regulators have allowed Baby Bells to offer in the last four years, are unlikely to see any major changes from either company's takeover.

Antitrust regulators are generally expected to require SBC, as a condition of the merger, to divest some number of AT&T long-distance customers in the 13 states where SBC is the local phone company. Similarly, Verizon might have to sell off a few million MCI long-distance customers in the 29 states where it has local service.

But as with the SBC-AT&T combination, access to MCI's top-tier business and government customers "is the reason Verizon is fighting so hard for MCI," Reed Smith said.

Verizon's new offer represents a roughly $2.75 per share cash increase from its initial bid for MCI earlier this month. On Monday, Qwest had issued an ultimatum to MCI's board to decide by next Monday whether to accept its bid, worth $10.50 in cash per share plus at least $15.50 in Qwest stock. Verizon boosted its bid to $8.75 in cash, plus at least $14.75 in Verizon stock, based on a so-called collar arrangement that puts a minimum value on the Verizon bid even if its share price dips.

MCI's chairman, Nicholas Katzenbach, who served as U.S. attorney general under President Lyndon B. Johnson in 1965–66, defended the company's willingness to take a lower bid. "We believe Verizon's substantial increase in its offer, the strength of its competitive position, and the financial certainty at close make this offer compelling to our shareholders, customers, and employees," Katzenbach said.

Verizon has a market capitalization of $97.6 billion, compared to just $6.9 billion for Qwest, which carries $17 billion in debt and serves vast, lightly populated swaths of the Western U.S. considered less valuable than the dense, coastal metropolitan areas of SBC and Verizon.

Jan Dawson, a principal analyst with Ovum, an Anglo-American global consulting firm, said MCI's decision to go with Verizon was an easy call. "Verizon is in much better financial and operational shape to take on a company of MCI's size and do what needs to be done to turn it around, without sinking itself in the process. Qwest-MCI would have been a disaster," Dawson said. "Verizon's higher offer allows MCI to appease shareholders while doing what always made the most sense."

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