Qwest Is Taking Its MCI Battle to Shareholders
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Qwest Communications International hired the Altman Group, specialists in building shareholder support for hostile takeovers, to help challenge MCI’s agreement to be acquired by Verizon Communications, people familiar with the matter said.
Hiring the Altman Group, which gathers shareholder votes, signals that Qwest’s chief executive officer, Richard Notebaert, is prepared to bypass MCI’s board and take his offer to investors. Mr. Notebaert plans to raise his $8.45 billion bid after MCI directors yesterday spurned it for Verizon’s new $7.64 billion proposal.
The Altman Group, founded 10 years ago, will help Qwest, the no.4 American local-telephone company, gauge whether investors would back its offer. While MCI directors rebuffed Qwest’s proposal three times, Mr. Notebaert has been emboldened by MCI shareholders such as Bruce Berkowitz of Fairholme Capital Management LLC and Bill Miller of Legg Mason Inc., who say Verizon’s offer is too low.
MCI’s board should “allow the shareholders to vote,” said Mr. Miller, who heads Legg Mason Capital Management in Baltimore, which owns 1.7% of MCI shares and more than 8% of Qwest. “I haven’t heard of any significant MCI shareholder that’s in favor of the Verizon deal.”
An MCI spokesman, Peter Lucht, and the Altman Group’s president, Kenneth Altman, declined to comment. “We have heard from a number of our shareholders,” said a spokesman for Denver based Qwest, Tyler Gronbach. “We continue to weigh all options.”
MCI’s chief executive, Michael Capellas, 50, accepted the lower offer, saying New York-based Verizon will form a stronger partner in a battle with SBC Communications for business customers.
Verizon, the no. 1 American local-phone company, has a market value of $96.6 billion and had 2004 sales of $71.3 billion. Qwest, with $13.8 billion in 2004 revenue, is capitalized at $6.9 billion.
Qwest as early as this week may raise its cash-and-stock offer to $27.50 a share from $26.50 a share, or as high as $8.95 billion, said a person who declined to be identified. The company also may bolster a so-called collar that protects MCI investors against a decline in Qwest stock, the person said.
Mr. Notebaert, 57, has revised the terms of Qwest’s offer at least four times since early February. MCI, the second largest American long-distance operator, generates $2 billion in annual cash flow that would help Qwest manage $17.3 billion in debt. MCI’s contracts with large corporate customers such as Hewlett-Packard would bolster Qwest’s declining long-distance business.
Qwest is prepared to “go to the mat” for MCI, said Banc of America Securities analyst David Barden, who hosted a dinner for some of MCI’s top investors and Qwest Chief Financial Officer Oren Shaffer at Le Bernardin restaurant in New York on March 28. He made the remarks in a research note Tuesday.
Qwest is having the Altman Group cull information from, rather than lobby, MCI shareholders, one of the people said. The company can’t try to persuade MCI stockholders until it makes a so-called S-4 filing with the Securities and Exchange Commission. An S-4 is a document that registers securities issued in mergers.
“It seems likely that this battle will eventually be decided in a shareholder vote,” a UBS AG analyst, John Hodulik, wrote in a research note yesterday.
The Altman Group advises companies on how shareholders might vote in so-called proxy battles. In cases of a hostile bid, would-be acquirers seek support from the target’s investors, who vote by proxy, or authorizing a representative to act on their behalf. Hostile suitors seek the votes so they can seat their own directors on a target’s board and push the takeover through.
Proxy advisers including Institutional Shareholders Services and Glass, Lewis & Company advised shareholders last year to vote against the re-election of Michael Eisner as chairman of Walt Disney Co., the second-largest American broadcast and film entertainment company. Mr. Eisner stepped down as chairman in March 2004 after 45% of investors withheld support for him.
Directors of Qwest met yesterday to consider the company’s next move, a person familiar with the matter said. Qwest’s existing $26 a share proposal has $10.50 in cash, including an MCI dividend paid March 15, and 3.735 Qwest shares valued at $15.50 as of Tuesday’s market close.
Verizon Tuesday said it would pay $23.50 in cash and stock, sweetening the $20.75-a-share offer that was accepted February 13. MCI didn’t give Qwest a chance to make a counteroffer after Verizon raised its bid, a person said.
MCI’s board “consists of people with little experience valuing companies,” Legg Mason’s Mr. Miller said. Five of the eight independent directors are lawyers, he said.