Qwest Hires Proxy Firm in Pursuit of MCI

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Qwest Communications International Inc. (Q) on Wednesday hired a proxy consulting firm, a clear sign it may bypass MCI's (MCIP) board and ask the long-distance phone company's shareholders to vote on Qwest's $8.45 billion offer as an alternative to MCI's new merger agreement with Verizon Communications Inc(VZ).

The Altman Group (search) was hired to augment investor relations for Qwest, the firm's president, Ken Altman, said Wednesday. He declined to discuss details of the tasks his firm is handling for Qwest.

Investors responded favorably again to the prospect of Qwest persisting with its bid, pushing MCI's shares even further above the $7.64 billion price tag Verizon agreed to pay on Tuesday.

The Qwest board was scheduled to meet Wednesday to "consider its options in the continued pursuit of MCI," a source familiar with the matter said late Tuesday on condition of anonymity. A company spokesman did not return messages seeking comment Wednesday.

The new deal with Verizon will cost $1 billion more than that company originally agreed to pay in mid-February, but is still worth $800 million less than the most recent Qwest bid.

Denver-based Qwest, with local phone service in 14 western states and a nationwide fiber-optic network, may still submit a sweetened offer to MCI's board or perhaps try a hostile takeover, several analysts said Tuesday.

Qwest has declined comment on its plans, but chief financial officer Oren Shaffer provided some hints of what's to come on Tuesday. Speaking at an investors conference before MCI's decision was announced, Shaffer said that Qwest would consult with MCI stockholders if its bid was rejected.

"Right now, we think that the shareholders' interests and our interests are aligned," he said.

Shares of MCI rose 55 cents, or 2.3 percent, to $24.33 on the Nasdaq Stock Market (search).

The new Verizon deal values MCI's shares at $23.10 each, not including a 40 cent dividend paid to MCI shareholders earlier this month. Qwest's offer values MCI at $25.60 per share. Both offers include dividends MCI plans to pay before either deal would be completed.

Verizon's shares rose 44 cents, or 1.3 percent, to $35.30 on the New York Stock Exchange (search), and Qwest fell 8 cents, or 2.1 percent, to $3.71, also on the NYSE.

MCI's board has been concerned about partnering with Qwest, which is financially weaker than Verizon, the dominant local phone company in the Northeast and Mid-Atlantic, as well as a top player in the cell phone industry.

Qwest is weighed down by $17 billion in debt, lacks a wireless division and faces growing competition from cable and high-speed data companies.

Still, analysts believe Qwest will press its bid for MCI.

"We do not expect that Qwest will completely abandon its pursuit of MCI and is likely to revise — increase — its offer and officially launch a hostile offer for MCI," Lehman Brothers analysts Andrew Whittaker and Blake Bath wrote in a research note published Tuesday.

Banc of America Securities analyst David Barden believes Qwest will take its bid straight to MCI shareholders.

"We expect any further bid from Qwest to emerge from a consultative process with MCI stockholders that still see a Qwest bid as the best option for maximizing their stock value," he wrote.

Analyst Donna Jaegers of Janco Partners Inc. said the process has been time-consuming for Qwest executives who should be focused on operations.

"I'm hoping Qwest gets the message and doesn't up its bid any further," she said.

Qwest said in a statement its proposal creates superior shareholder value. "We are going to assess the situation and determine what is in the best interests of shareowners, customers and employees," the company said.

A spokesman declined additional comment, but Shaffer said the only reason Qwest has pushed this much is because of MCI shareholders who believed the Qwest offer was better.

"The idea that maximization of value is a nice easy thing to understand and it's clear our views are aligned in that matter," he told analysts.

Qwest sees an MCI acquisition as a way to boost its bottom line. Analysts have said the combined companies would increase Qwest's free cash flow, allowing it to pay down some of its debt.

After MCI rebuffed its initial bid in mid-February, Qwest led by chief executive officer Richard Notebaert continued its dogged pursuit, sweetening its offer twice as it was bolstered by MCI shareholder opposition to the Verizon bid. MCI reopened talks with Qwest, but ultimately chose Verizon.

In all, Qwest has raised its bid by $500 million and Verizon's stock has declined since the battle began. Notebaert and Verizon CEO Ivan Seidenberg have also waged the battle publicly through letters, at times sharply worded, to the MCI board and a flurry of news releases.