NEW YORK – Verizon Communications Inc. (VZ) on Monday said it would acquire long-distance telephone company MCI Communications Inc. (MCIP) for $6.75 billion, an apparent response to the acquisition of AT&T Corp. (T) by SBC Communications Inc. (SBC) and the third big telephone industry merger in two months.
The agreement announced Monday, scuttling a competing bid for MCI by Qwest Communications International Inc. (Q), will result in about 7,000 job cuts from the combined Verizon-MCI work force of about 250,000 employees.
Verizon's offer includes $4.8 billion in stock and $488 million in cash. MCI will also pay dividends of $4.50 per share, or nearly $1.5 billion, bringing the total value for MCI shareholders to more than $6.7 billion.
The purchase price was about a half billion dollars below what Qwest offered for MCI, which recently changed its name from WorldCom Inc. after emerging from bankruptcy and a huge financial fraud.
Verizon, the dominant local phone company in the Northeast and a top cellular player, likely won MCI's favor because it is larger and in better financial shape than Qwest, the local phone carrier across the more sparsely populated Rocky Mountains and Pacific Northwest.
Denver-based Qwest had no immediate comment on the deal when contacted on Monday.
The boards of both companies have approved the agreement, which also needs approval from MCI shareholders and regulatory authorities that the companies hope to obtain in about a year.
"For Verizon, this deal represents a `Why not?' strategy. With significant financial security, Verizon can easily pull this deal off," said Ben Silverman, telecom analyst for investment newsletter FindProfit.com. "The deal cements Qwest's place as an `also-ran' and `has been' in the telecom arena."
Verizon, which serves mostly small- and mid-sized businesses, sees MCI as a quick entry to supplying communications services to large corporations.
MCI, which started out in the 1960s as a scrappy competitor to AT&T before being acquired by Mississippi upstart WorldCom in 1988 and eventually collapsing into bankruptcy amid an accounting scandal, is the No. 2 player in the multinational communications market behind AT&T.
Shares of MCI, which have risen in recent weeks on word of its talks with Verizon and Qwest, fell 4.8 percent to $19.66 in on Nasdaq, while Verizon's shares rose 48 cents to $36.79 on the New York Stock Exchange. Qwest shares fell nearly 7 percent to $3.87 on the NYSE.
Steve Cohen, a fund manager at Kellner DiLeo Cohen in New York, said some MCI investors were disappointed that Qwest's bid — which sources said had been raised in recent days to $7.3 billion — did not push the final price higher.
For Verizon, "it's perceived as a good deal for them, a smart deal, and they didn't really pay up for this thing," Cohen said.
Banc of America analyst David Barden said in a research note that Qwest "would face an uphill struggle to convince stockholders to dump Verizon," noting that both boards have approved the deal.
Under terms of the agreement, MCI shareholders will receive 0.4062 share of Verizon common stock for each common share of MCI, worth a total of $4.8 billion, and $1.50 per MCI share in cash, worth another $488 million.
MCI will also pay its shareholders quarterly and special dividends of $4.50 per share, including a 40 cents per share quarterly dividend approved by the MCI board on Friday.
Verizon, which will assume MCI's net debt of about $4 billion, said it expects the transaction to dilute its earnings by about 10 cents per share, excluding acquisition costs and any amortization of intangible assets created at the time of the acquisition. Verizon said it expects the deal to be essentially breakeven in the third year after the deal is closed.
While buying MCI saves Verizon the time and money of building a corporate-services business on its own, MCI still requires significant investments to upgrade and integrate its networks, sources familiar with the situation said.
Verizon estimates the acquisition will yield a net present value of $7 billion in incremental revenues and operational savings, including related investments in network and systems.
The costs are estimated to be about $1 billion to $1.5 billion in expense and $2 billion in capital during the first three years.
Reuters and the Associated Press contributed to this report.