MCI in play

Wow. My prediction regading MCI took even less time to materialize than I expected.

The Cliff Notes version of the facts:

• On February 4, MCI received an unsolicited $6.3 billion takeover bid from Qwest Communications International.
• On February 14, Verizon made an offer to buy MCI for $6.7 billion in stock and cash. (Each share of MCI stock would garner $14.42 in Verizon stock, $1.50 in cash and $4.50 in MCI dividends.)
• Today, Qwest upped its offer for the second time. (Under the latest Qwest offer, each share of MCI stock would receive $15.50 in Qwest stock, $3.10 in cash and $6 in MCI dividends.) The revised Qwest offer is worth about 20% more than the Verizon offer.
• Also today, MCI reported a loss of $32 million in the fourth quarter of 2004 and a loss of $3.89 billion ($12.12 a share) for all of 2004 (due to heavy bankruptcy-related impairment charges in the third quarter). Quarterly revenue fell 10% to $4.97 billion (from $5.5 billion a year before) and annual revenue fell 15% to $20.7 billion.
• MCI's board will review Qwest's offer while pressing ahead with a deal with Verizon, says CEO Michael Capellas told investors on a conference call. Verizon is the "right partner" for MCI, he said.

The "insights" from the "experts" and other observations:

• The SBC-AT&T and Verizon-MCI transactions are an acknowledgment of what insiders have known for a while: that the long-distance business as a stand-alone service is, for all practical purposes, dead. "I think we all knew it was over two to three years ago," says Dominic Endicott, head of the telecommunications practice at Booz Allen Hamilton. "The deals are just cleanup work." Raul Katz, CEO of Adventis, a consulting group in Boston, goes a step further. "The long-distance business was always dead," referring to the industry's ultimately fruitless scramble to figure a way around the Bells' grip on the local phone markets. "It was just a matter of when it was going to die."
• Qwest has a market value of just $7.5 billion but $17 billion in debt. Analyst believe that if Qwest wins the bidding war, it will use MCI's $5 billion cash reserve to help pay down its debt.
• Analysts have said Qwest is a weaker partner for strategic reasons. It doesn't own its own wireless network, which is considered critical for growth in the telecom industry. It also serves a primarily rural, 14-state region where there are few business centers, so a marriage with MCI would not likely result in as many cost efficiencies.
• Although Verizon is the strongest among the regional phone companies, it faced a difficult task of determining whether it would be cheaper to build its own corporate client base, rather than buy MCI's, analysts said. With most of MCI's business going away or under attack from stiff competition, some said it could have been more effective for the company to build its own roster of customers.

Articles:

• http://www.usatoday.com/money/industries/telecom/2005-02-14-verizon-mci-usat_x.htm
• http://www.usatoday.com/money/companies/earnings/2005-02-25-mci_x.htm?POE=MONISVA
• http://www.eweek.com/article2/0,1759,1760078,00.asp?kc=EWRSS03119TX1K0000594
• http://www.bloomberg.com/apps/news?pid=10000103&sid=aj2OsGSJ9V0Q&refer=us
• http://money.cnn.com/2005/02/14/technology/verizon_mci/
• http://www.cbsnews.com/stories/2005/02/14/ap/business/main673848.shtml
• http://www.washingtonpost.com/wp-dyn/articles/A22085-2005Feb13.html