Verizon Expected to Raise MCI Bid

Verizon (VZ) is widely expected to boost its bid for MCI Inc. (MCIP) again now that the long-distance phone company has embraced a rival $9.75 billion bid from Qwest (Q), though it remains unlikely Verizon will need to pay as much to win MCI back.

Analysts also say MCI's board had little choice but to declare the latest Qwest (search) offer superior by Saturday's deadline, given the dubious legal grounds for sticking with a Verizon (search) deal worth just $7.5 billion.

That means, to Qwest's continuing dismay at being treated as a second-rate suitor, its "best and final" offer will amount to just another bargaining chip for MCI's board — unless Verizon unexpectedly surrenders after a three-month bidding war.

Starting Monday, Verizon faces a five-day window to respond with an improved offer or walk away with a $240 million breakup fee. It also has the right to ignore that deadline and force MCI (search) investors to vote on the current deal, hopeful that enough fear Qwest's shaky finances and strategic outlook.

However, MCI's board can't officially swing its recommendation from Verizon Communications Inc. to Qwest until the five days elapse. MCI said Saturday that Qwest's proposal gives the board until May 3 to recommend its shareholders vote for that deal.

At least one of the hedge funds that hold large chunks of MCI's stock remained determined Sunday to press MCI's board to abandon all considerations but the highest price.

"It is time for Verizon to match the Qwest offer or walk away next week and not hold the entire process hostage by forcing a vote on their current offer that has no chance of approval," Elliott Associates L.P. said in a statement.

The hedge fund also stressed that a new Verizon offer matching only what that company agreed to pay two weeks ago for a 13.4 percent stake in MCI would be inadequate.

Verizon's deal with Mexican billionaire Carlos Slim Helu valued MCI at $25.72 per share. That's more than 10 percent higher than the $23.10 Verizon has already agreed to pay the rest of MCI stockholders, but still nearly 15 percent below the $30 Qwest offer.

"We continue to consider Qwest's new offer better than the offer Verizon has made for the Slim shares," Elliott said.

Regardless of who wins, more analysts are questioning whether the bidders are at risk of overpaying for MCI's struggling business.

Qwest's $30 offer values MCI about 50 percent higher than when the bidding began.

And on the basis of profit forecasts, it also values MCI's earnings prospects as much as 50 percent higher than those at AT&T Corp., whose $16 billion deal to be acquired by SBC Communications Inc. set off the scramble for MCI.

"We don't believe the risks associated with acquiring and integrating MCI are worth the prices being offered by either Qwest or Verizon," said Ben Silverman, an industry analyst for the investment newsletter "Thus, the only winners in this equation stand to be short-term MCI shareholders."

Qwest Communications International Inc. issued a statement Saturday saying it was "gratified" by MCI's decision, but sounded a note of distrust.

"We expect MCI to build upon its declaration of superiority with specific acts of support, including expeditiously seeking regulatory approvals of a transaction that it considers superior and in the best interests of its shareowners," the statement said.

Should Verizon choose to pay more, it wouldn't necessarily need to match the $30 a share which Qwest offered Thursday.

MCI's board has twice accepted lower-priced deals with Verizon, so Verizon could prevail again with a lower bid.

The board has repeatedly expressed concern about Qwest's $17 billion debt load and the long-term value of the Qwest shares MCI investors would receive as partial payment. The MCI board also has questioned whether Qwest can meet its forecast of nearly $3 billion a year in cost savings from the proposed merger.

Silverman said the merger of two weak players like Qwest and MCI could play out in Verizon's favor because "in a few years, the company may very well have an opportunity to buy a combined Qwest-MCI at a much lower price."

New York-based Verizon is one of the nation's two biggest local and wireless phone companies. Denver-based Qwest is the local service provider in 14 mostly Western states.

Based in Ashburn, Va., MCI has been hit hard by competition and a bankruptcy brought on by the WorldCom scandal, but still possesses a valuable customer base and national fiber-optic network.