MCI CEO Says Verizon Remains Right Merger Partner
MCI CEO Michael Capellas said on a conference call Fri. that his company remains convinced Verizon is the “right partner” for a merger. But he also acknowledged the concerns expressed by some large shareholders and said MCI would consider the revised offer from Qwest the company received late Thurs. (CD Feb 25 p8). Capellas reflected on the merger only in general terms, at the end of a half-hour presentation on MCI’s 4th quarter and 2004 results. “Obviously we entered into in so we believe in it,” he said of the Verizon deal. “We'll also continue to honor our fiduciary responsibilities.”
Sign up for a free preview to unlock the rest of this article
Communications Daily is required reading for senior executives at top telecom corporations, law firms, lobbying organizations, associations and government agencies (including the FCC). Join them today!
Leon Cooperman, chmn. of Omega Advisors, one of the largest MCI shareholders, raised the stakes after Capellas started to take financial community calls. Cooperman, a critic of the Verizon merger offer, asked pointedly if MCI was ready to sit down with Qwest. “I always listen to your remarks and I just get so excited about the prospects of our business and then I see the price that we're willing to sell it for,” Cooperman said. “It doesn’t really compute or relate to the kind of optimism you express.”
Cooperman asked Capellas point blank: “What has to happen for you to sit down with Qwest?” Cooperman noted that major Qwest shareholders are willing to take on more financial risk than Capellas may have assumed. He termed Qwest’s revised offer “disappointing” but noted it was still higher than the offer from Verizon. Capellas didn’t respond directly to Cooperman, refusing to expand beyond his more general remarks. MCI said in a statement after the revised Qwest offer: “MCI’s Board will conduct a thorough review of the Qwest offer, as it has with all previous offers.”
Precursor Pres. Scott Cleland told us Fri. some wrongly suggest that a contest is underway between the Bells. “People may be misinterpreting this as an auction,” Cleland said. “Verizon already has a deal with MCI. MCI has already rejected this Qwest offer in a slightly modified form.” Cleland added: “While Qwest has many valid arguments and the Qwest-MCI transaction has great potential synergies it appears that Qwest was unable to convince MCI of those benefits relative to Verizon’s offer.”
Janco Partners analyst Donna Jaegers said Fri. that MCI is unusual in that hedge funds control such big blocks of stock. But Jaegers said the current MCI board takes its responsibilities seriously and will also look to the long term interest of shareholders. But at the same time, without the support of some big investors the company could lose a shareholder vote on the merger. MCI officials “were very tight lipped on the call,” she said. “I think they realize it’s their fiduciary duty to at least look at Qwest’s offer. I would imagine that Qwest and MCI will start to talk a little more with MCI really looking at the offer. I would think they might invite Verizon back in.”
Banc of America analyst David Barden suggested a contest could occur. “The emerging battle for MCI is shaping up as a battle of Qwest’s will power versus Verizon’s financial power,” Barden wrote in a research note. “In poker terms, Qwest has a short stack but is going ‘all in,’ forcing Verizon to decide how committed it really is to closing the MCI deal.”
Legg Mason said in MCI’s final decision “will be fundamentally a financially driven strategic decision.” Legg Mason added that Qwest continues to maintain its offer would be easier to get past regulators. “We acknowledge that on some level it would probably be harder for the government to swallow a Verizon takeover of MCI than a Qwest takeover, but we also continue to find the prospect of a materially quicker and easier government review of Qwest-MCI to be more speculative than likely,” the firm said.
Meanwhile, Standard & Poor’s Ratings Services put Qwest on CreditWatch with negative implications because of the risk associated with an MCI offer, if successful. “As a long- distance carrier, MCI is facing ongoing stiff competition from other carriers, especially AT&T,” S&P said. “Moreover, MCI is considered to be competitively disadvantaged relative to AT&T in terms of its materially smaller presence in the enterprise segment and fewer local points of presence.”
MCI, the #2 U.S. long-distance operator, saw a 4th- quarter net loss as revenue dropped 10% over the same quarter in 2003. Quarterly revenue decreased to $4.97 billion from $5.5 billion a year ago. Much of the lost revenue was tied to MCI’s reduced efforts selling to consumer markets. Mass markets reported a 21% drop in quarterly revenue.
MCI reported a net loss for the 4th quarter of $32 million, compared to income of $22.2 billion in the fourth quarter of 2003, tied to the financial impact of reorganization activities, and a net loss of $3.4 billion in the 3rd quarter. For all of 2004, revenues were $20.7 billion, down 15% from 2003 revenues of $24.3 billion. Operating loss came in at $3.2 billion.