Verizon pips Qwest in bid for MCI

MCI Inc. Tuesday morning announced that it has accepted a new bid from Verizon Communications Inc. that very well may take Qwest Communications International Inc. out of the running to acquire the second largest service provider in the U.S. for good.

Verizon is now bidding about US$900 million over its original offer of $6.7 billion. And like Qwest, Verizon is also now offering a stock collar which gurantees that MCI stock holders will receive a set minimum amount in the event Verizon’s stock price drops.

Verizon said it had agreed with MCI to amend the terms of the agreement to acquire the carrier, and that MCI’s board of directors is recommending approval of the amended agreement to its shareholders.

Under the amended agreement, Verizon will acquire MCI for approximately $7.6 billion. Verizon increased the cash consideration to be paid to MCI shareholders by $2.75 per share.

Verizon has also agreed to a downside protection mechanism that assures that the value of this stock component will be no less than $14.75 regardless of a decline in Verizon’s stock price between signing and closing. In addition, the MCI shareholders will gain the upside benefit if Verizon’s stock price rises above the $14.75 level.

The new terms also allow Verizon to elect to require MCI to put the proposed transaction with Verizon to a vote of the MCI shareholders. MCI has also agreed that the “break-up fee” to be paid by MCI to Verizon if the deal is scuttled will be $240 million instead of the previous $200 million. MCI has also agreed to reimburse Verizon for up to $10 million in expenses in certain circumstances.

Despite Verizon’s sweetened bid, it’s still less than Qwest’s latest bid to acquire MCI for $8.75 billion. Qwest also says it has secured additional financing to pay for the acquisitions after MCI raised concerns that Qwest wouldn’t be able to pull together the cash portion of its offer.

Qwest put out a statement today saying that it is evaluating the situation and will decide what’s “in the best interest of shareowners, customers and employees” based on MCI’s latest decision.

In a statement released today, MCI says it considered the changing competitive nature of the telecommunications industry, increasing need for scale and comprehensive wireless capabilities, strong capital structure, long-term network service quality and long-term customer confidence as some of the reasons why it selected Verizon over Qwest.

Clearly MCI had more confidence in Verizon to begin with considering after months of talks with Verizon and Qwest, MCI choose Verizon. MCI and Verizon announced in mid-February that the companies would merge.

Despite the announcement Qwest went back to MCI with a new offer that it said time and again, was better for MCI and its shareholders.

Verizon agreed to allow MCI to talk with Qwest, but not indefinitely. MCI had until midnight on Monday March 28 to talk with Qwest. It appears as soon as that clock stopped ticking, MCI’s board approved Verizon’s latest bid.