MCI accepts Verizons $7.6 billion offer

Washington, March 29 | Updated: Mar 31 2005, 05:30am hrs
MCI Inc accepted a sweetened takeover offer of $7.6 billion from Verizon Communications Inc on Tuesday, citing Verizons scale and growth prospects in rejecting Qwest Communications International Incs $8.45 billion bid. Shares of MCI rose 4%, and traded higher than Verizons offer price as investors speculated on the likelihood of a hostile bid from Qwest.

Qwest said it would assess the situation but still believed its bid was superior. A source familiar with the situation said Qwests board would meet on Wednesday to consider raising its bid. If Qwest persists in its battle, it could bypass MCIs management and take its offer directly to the companys shareholders.

But MCI has a defence mechanism against unwanted takeovers, making it costly for anyone to buy 15% or more of its stock. Many MCI shareholders have urged Qwest to pursue MCI, saying Verizons original $6.75 billion offer was too low. Verizon said its revised bid was a compelling offer for MCI shareholders.

Verizons revised bid is a step in the right direction. Its not over, said Bruce Berkowitz, whose Fairholme Fund owns 11 million MCI shares, ahead of MCIs official announcement. Qwest still has a superior offer. Qwests synergies are real. MCI is hugely valuable to both Qwest and Verizon. The highest bid should win, Mr Berkowitz said.

MCI said Verizon raised its cash-and-stock offer by about $900 million to $23.5 per MCI share. This included $8.75 per MCI share in cash and $14.75 per MCI share in Verizon stock. Verizons deal value includes a dividend of 40 cents per share that MCI paid earlier this month.

Of the $8.75 per share in cash, up to $5.6 would be paid to MCI shareholders when they approve the deal, and the bid includes protection for MCI shareholders against a decline in Verizons stock price. Lehman Brothers analysts Andrew Whittaker and Blake Bath said while Verizons new bid gave it the upper hand, Qwest still likely had the support of many MCI shareholders.

We do not expect that Qwest will completely abandon its pursuit of MCI and is likely to revise (increase) its offer and officially launch a hostile offer for MCI, the analysts said in a research note. Qwest had given MCI until April 5 to accept or reject its bid, after weeks of talks in which Qwest increased the amount of available financing for its bid to $5.75 billion.