- The Washington Times - Friday, April 1, 2005

NEW YORK (AP) — MCI Inc. invited Qwest to reopen merger talks yesterday, just three days after the long-distance phone company agreed to a sweetened $7.5 billion buyout from Verizon and a day after Qwest raised its bid to nearly $9 billion.

Qwest Communications International Inc. did not immediately respond to the announcement, so it was not clear whether the company would stick to the April 5 deadline it has set for MCI to accept its offer.

MCI’s stock rose for a fourth straight session yesterday — to a level nearly 10 percent higher than the price Verizon has agreed to pay — as investors again speculated that either Verizon will be forced to boost its bid again, or that Qwest might pull off an upset in the two-month tussle.

But rather than bidding higher, Verizon could try to halt the bidding by triggering a provision in its agreement with MCI that would require a straight vote by MCI shareholders on the current deal.

In that scenario, Verizon would be betting that longer-term MCI investors are too concerned about Qwest’s financial frailty and whether the Qwest’s shares they’d receive as payment would hold their value. Much of the pressure on MCI’s board to accept Qwest’s offer has come from hedge funds and other short-term investors who’d likely dump their Qwest shares soon after receiving them.

“We may ask for a vote at some point and have that right under our agreement of [March 29], but have not yet. No comment on whether we will,” Verizon spokesman Eric Rabe said.

There’s also an element of pride and potential embarrassment at play as Verizon plots its strategy.

While it can easily afford to outbid Qwest, Verizon would hate to pay a price that assigns a higher relative value to MCI’s business compared with what SBC Communications Inc. is paying to acquire AT&T; Corp.

Both MCI and AT&T; are ailing financially, losing customers and revenues to rivals who offer not only long-distance calls, but local, wireless and Internet services.

But MCI’s business is in worse shape owing to the huge financial scandal when the company was still known as WorldCom Inc. and its ensuing bankruptcy.

In terms of overall price tag, the $16 billion SBC is paying for AT&T; is still about twice as much as the latest offers for MCI.

But investment analysts at UBS Investment Research and Citigroup Smith Barney noted this week that Verizon’s new agreement already values MCI’s estimated future earnings more richly than AT&T;’s.

“While we believe the economics of the bid are relatively easy to justify, given the level of synergies predicted by the company, [Verizon] management may begin worrying about the optics of paying well in excess of the [valuation] SBC paid for AT&T;,” John Hodulik of UBS wrote yesterday in a research update.

The new Qwest Communications International Inc. offer submitted Thursday values MCI at $27.50 per share, or $8.94 billion, in cash and Qwest stock. The Verizon deal, which replaced a $6.75 billion agreement reached in mid-February, values MCI at $23.10 per share in cash and stock.

Shares of MCI rose 34 cents, or 1.4 percent, to $25.24 in afternoon trading on the Nasdaq Stock Market. Verizon shares fell 38 cents, or 1.1 percent, to $35.12 on the New York Stock Exchange, while Qwest shares slipped 6 cents, or 1.6 percent, to $3.64 on the NYSE.

MCI’s board has repeatedly expressed a preference for partnering with Verizon, twice rejecting higher-priced bids from Qwest out of concern about that company’s weak financial health and poor business prospects.

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