Verizon Threatens to Pull Out of $7.6B MCI Deal

Verizon Communications Inc. (VZ) on Monday said it would pull out of its $7.6 billion deal to buy MCI Inc. (MCIP) if MCI's board deemed a rival $9.07 billion bid by Qwest Communications International Inc. (Q) "superior."

The move suggests Verizon is unwilling to raise its bid for MCI a second time, and pressures MCI's board to finally choose between Verizon's stability and Qwest's higher price. Shares of Qwest rose on the news.

In a letter to MCI's board and management, Verizon Chairman and Chief Executive Ivan Seidenberg said Qwest had submitted an inferior offer for MCI, and was seeking to "raid its balance sheet and use it as a financial life boat."

If MCI deems Qwest's offer superior, it would show that "the decision-making process is being driven by the interests of short-term investors rather than the company's long-term strength and viability," Verizon said.

"Should this occur, we would no longer be interested in participating in such a process," the company said.

A MCI spokesman declined to comment.

Qwest had given MCI until Tuesday to consider its $9.07 billion bid, its second revised offer after several months of talks. Should MCI do so, Verizon could reply with a higher offer in five days or accept a break-up fee of up to $250 million.

Despite Qwest's higher price, MCI has repeatedly rebuffed its bids, citing Verizon's secure financial health and strong growth prospects as reasons for selecting it as a buyer. Verizon is the largest U.S. telecommunications company.

Several large MCI shareholders have encouraged the company to consider Qwest's offers, saying Verizon's offer was too low. MCI had talked with Verizon and Qwest for months before agreeing in February to be bought by Verizon for $6.45 billion.

Qwest said on Monday it had given MCI proof of its $5.75 billion in financing commitments. With a market value of $6.8 billion and $17 billion in debt, Qwest is relying on outside financing for part of its deal.

Verizon and Qwest see MCI as their best hope of expanding into the market for telecommunications services to large businesses. MCI is the second-largest provider of such services, behind AT&T Corp. (T), which has agreed to be bought by SBC Communications (SBC) for $16 billion.

While MCI would be a small part of Verizon, Qwest has said a merger would help it transform its balance sheet. Qwest has said it could generate $14.8 billion in cost cuts from the deal, improving its cash flow and debt.

But several analysts say Verizon and Qwest are likely overpaying for MCI, whose revenues are expected to decline by 12 percent this year due to a shrinking consumer arm and weak pricing for business services. Both Verizon and Qwest's latest bids value MCI at six to seven times its estimated 2005 operating earnings. SBC's price for AT&T was equal to about five times its estimated operating earnings for 2005.

"I'd say it (MCI) is overvalued," said Marquis Investment Research analyst Greg Gorbatenko. "Verizon felt like they were going to be left without a date for the prom when SBC went after AT&T. Qwest is basically very desperate."

Shares of Qwest rose 4.4 percent, or 16 cents, to $3.80 on the New York Stock Exchange (search), while Verizon's shares rose 39 cents to $35.58. Shares of MCI fell 21 cents to $25.08 on Nasdaq.