Qwest Calls on MCI to Negotiate Latest Merger Offer

MCI Chmn. Nicholas Katzenbach, meanwhile, sent Notebaert a letter laying out the extensive contacts between MCI and Qwest in recent months, attempting to establish that MCI has fully evaluated Qwest’s offer while deciding instead to accept Verizon’s bid.

“We feel that we've made a very good proposal and it’s a proposal that in the short term if you're a practical investor you get more cash, about a $1 billion more cash for the transaction,” Notebaert said.

Notebaert didn’t commit to raising its dollar offer for MCI, though he left that possibility on the table. “We have had no response,” he said of Qwest’s revised offer. “I don’t know that it is good enough or not good enough. We think it is a superior deal.” Notebaert said Qwest wanted guidance from MCI. He said Qwest was open to making another bid based on feedback from MCI.

Analysts mostly asked about financial aspects of the deal during a meeting that ran almost 90 min. MCI said last week that despite the higher dollar offer from Qwest the its merger agreement with Verizon remains a superior deal (CD Feb 28 p1).

Notebaert was quick to call on Lee Cooperman of Omega Investors, a major holder of MCI stock who has been outspoken in arguing that the MCI board should hold discussion with Qwest on its offer. “I really hope that the MCI board and management are listening to this presentation and would be very disappointed if they weren’t,” Cooperman said. “The MCI board thus far has said the $24.60 [per share offer] you have suggested is worth less than $20.75” from Verizon. He asked: “What can you do or are you willing to do to get them to the table that you have not yet done?”

Cooperman said MCI management seems most concerned about 2 issues, Qwest’s highly leveraged balance sheet and the contingent liabilities, or potential obligations, the company faces, as described in various SEC filings.

Notebaert assured Cooperman that Qwest’s financial picture is brighter than it may appear in some filings. He said Qwest is conscientious in disclosing liabilities in its filings at the SEC. “That section of an [8]K, we are supposed to write it in a way that’s a very dark picture. It’s supposed to be the worst case. We do a very good job of that,” he said. “There are many companies that have liabilities. We've disclosed them. We reserve for them.”

Much of the discussion focused on possible cost savings. Qwest promised savings of as much as $10 billion over 4 years in its presentation Tues., including those that would come through job cuts. Notebaert said that the savings estimates grew from extensive discussions with MCI at all levels.

“We spent 10 continuous months having discussions at the working level [with MCI] about synergies,” he said. “We put together what we thought was the right synergy plan. A lot of synergies come from us. We get more POPs… We also get the consolidation of what I think are redundant expenses. Very straightforward… We have the long haul. They have the long haul. If you put the 2 together we are able to optimize the 2 sets of assets.”

Notebaert also said Qwest remains committed to selling UNEs to competitors. “We now have agreements to sell UNEs, commercial contracts without government help or advice, with over 73 companies,” he said. “We want to sell UNEs as long as we set the price… We are competition oriented. We like the idea of having multiple channels.”

Katzenbach reminded Notebaert in his letter the 2 companies held “25 in-person meetings and more than 50 joint conference calls” in recent months to discuss a possible merger. “During this time the MCI Board conducted 26 board meetings in which strategic options, including opportunities with Qwest, were discussed,” he wrote. “[The MCI board] reviewed all options in a process that was both thorough and deliberate.”