Rebuffing a more substantial offer from Qwest Communications International Inc., MCI Inc. agreed last week to be acquired by Verizon Communications Inc. for approximately $6.7 billion. Qwest, which initiated the latest bidding for MCI, reportedly offered $8 billion but was turned down due to funding concerns.
Verizon said the deal calls for MCI shareholders to receive 0.4062 shares of Verizon common stock for each common share of MCI, which values each MCI share at $14.75 and totals $4.795 billion. MCI shareholders will also receive $1.50 per MCI share in cash, accounting for an additional $488 million of the acquisition price and will receive $4.50 per share in quarterly and special dividends from MCI worth $1.463 billion. In total, the transaction values MCI shares at $20.75 per share, which was also MCI’s closing price last Friday.
Verizon also said it would assume approximately $4 billion of MCI’s net debt once the deal closes early next year.
Verizon explained that the transaction will strengthen its enterprise offering and provide the company with a nationwide presence that can compete with larger incumbents. The deal also provides Verizon with a global presence using MCI’s network backbone, as well as a competitive counteroffer to rival SBC Communications Inc.’s recent $16 billion acquisition of AT&T Corp.
“This is the right deal at the right time,” said Ivan Seidenberg, Verizon chairman and chief executive officer. “We have been evaluating a transaction with MCI for some time, and now we have the opportunity to reach an agreement at the right price that works for both companies and at a time when MCI is gaining momentum. It is a natural and logical extension of Verizon’s strategy to transform our company to serve growth markets and offer broadband technologies.”
Verizon added that the deal will yield a net present value of $7 billion in incremental revenues and operational savings as well as cutting approximately 7,000 jobs. Costs associated with network integration would range between $3 billion and $3.5 billion during the first three years. Verizon added that the deal will dilute its earning per share by 10 cents, but it expects the transaction to be essentially breakeven and cash flow positive within three years.
Analysts noted the deal is a good move by both companies but pointed out that the transaction was further proof that the government’s attempt in 1984 to increase competitiveness in the telecommunications industry by breaking up AT&T has fallen short.
“Together with the acquisition of AT&T by SBC, the U.S fixed market has now been completely reshaped,” noted Ovum chief analyst Julian Hewett. “With the wonderful perspective of hindsight, the competitive industry structure imposed by the enforced breakup of AT&T in 1984 can be seen as a failure.”
Qwest, which despite recent debt reductions is still carrying more than $17 billion in debt, said its offer was valued at $23 per share and consisted of $7.50 in cash and $15.50 in Qwest common stock for each MCI share and a $1.60 per share dividend. Qwest also noted late last week in a Securities and Exchange Commission filing that it had sent a letter to MCI’s board of directors stating that it plans to submit a modified offer after it has time to review Verizon’s bid.
