Qwest Promises Faster Merger Approval with MCI
Regulatory issues and a potentially much faster approval process were cited prominently by Qwest in a letter to MCI as reasons, along with a higher dollar offer, MCI should accept Qwest’s offer over Verizon’s. But analysts told us Fri. the regulatory argument in particular may prove spurious, since regulatory review is a black box. A key factor could instead be increasingly vocal opposition to the Verizon-MCI deal by major stockholders.
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“I think the market discounts that as a big deal,” Tim Gilbert, a fixed-income analyst at Principal Global Investors, said of the regulatory arguments. “The cash part of the deal is greater from Qwest than it is from Verizon. There’s no clarity on the regulations. Right now that’s the least convincing argument that Qwest can use.”
Qwest released details of its offer for MCI, designed to show that its offer was about $1 billion higher than the $6.75 offered by Verizon. Qwest CEO Richard Notebaert alleged Tues. that MCI’s board left $1 billion “on the table” in rejecting its bid (CD Feb 16 p7).
In addition to the higher dollar total “Qwest’s proposal is superior to the Verizon proposal because our regulatory approval process is likely to be completed at least 6 months more quickly,” Notebaert wrote in the letter to MCI, sent after the close of the markets Thurs. Speedy approval makes the Qwest offer more valuable, he insisted: “The value to the MCI shareholders from participation in approximately 40% of the synergies in a Qwest transaction will substantially exceed the value of synergies that would be received by MCI Shareholders in a Verizon deal.”
Legg Mason said in a research note Qwest and Verizon present different obstacles to quick merger approval with MCI. The firm observed that the amount of time FCC and Dept. of Justice staff will have to spend analyzing the more complicated SBC-AT&T merger is as big a factor as anything else.
Different considerations would enter the competitive analyses, Legg Mason said. “Qwest, by virtue of its nationwide IXC operations and Internet backbone, competes with MCI in a variety of ways that Verizon is more recently beginning to, and with a greater focus on its regional territories,” the firm said. “On the other hand, Verizon’s share of the telecom expenditure of the business customers, in local and long distance, is certainly greater than Qwest’s.” Bottom line, the firm said: “Our preliminary analysis suggests that while the analysis could be different, the most likely outcome is that both deals would travel a complicated, but similarly long, path to approval.”
Janco Partners analyst Donna Jaegers said neither company could clearly get the deal done faster. Qwest, she noted, would need approvals from 14 states. “Qwest claimed it would be 6 months faster, but you've got to discount that. They've still got the 14 state approvals. In the scheme of time I think you're only talking about a month” advantage for Qwest.
Medley Global Advisors analyst Jessica Zufolo predicted either merger would be looked at closely by regulators and would take time to complete. “The regulatory issues between MCI and Qwest are really no different than Verizon-MCI. They're large wireline companies that are consider dominant in their service territories. States will probably look at these deals in the same way.” Zufolo had predicted in an earlier note that Verizon-MCI approval could take somewhat longer than the 12 months predicted by the companies.
A major emerging factor, analysts agreed Fri., is that large MCI shareholders like Paulson & Co., Omega Advisors and Fairholme Capital Management have demanded that MCI management negotiate with Qwest in the interest of cutting the best possible price. Qwest “can ride the momentum that is coming from the major shareholders who have been vocal against the MCI-Verizon deal,” Gilbert said.
“The bottom line is who puts more money on the table,” said a regulatory attorney. “Anybody who thinks you can move a Verizon deal more quickly, my hat’s off to them, but I think they're wrong… With Qwest, it’s obviously not as controversial because you're going to the smaller Bell.”
In meetings with stockholders, MCI CEO Michael Capellas stressed Qwest’s debt level, shareholder lawsuits tied to former CEO Joe Nacchio and limited potential for growth as reasons for agreeing to the Verizon deal, The Denver Post reported. “Although the Qwest bid is nearly 20% more than the Verizon offer… the value of Qwest’s equity is somewhat more dubious, in our opinion and apparently in the opinion of the MCI board as well,” Greg Miller, analyst at Fulcrum Global Partners, wrote in a research note.