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Verizon Makes Move On MCI

UPDATED Verizon and MCI executives today laid out plans to combine their operations in a deal valued around $6.7 billion.

Directors at both companies have approved the merger, though the sale still needs approval from MCI shareholders and federal regulatory agencies like the Federal Trade Commission (FTC) and Department of Justice (DOJ). According to officials, Verizon shareholder approval isn't necessary.

If approved, MCI shareholders will receive .406 shares of Verizon common stock for every share they own, valued at $4.8 billion; as well as an additional $1.50 per share, worth $488 million, from Verizon. In addition, MCI will pay its shareholders a quarterly and special dividend of $4.50 per share, worth $1.5 billion.

Verizon will also pick up MCI's $4 billion net debt, primarily a product of the company's $107 billion bankruptcy filing in 2002. The trial against former chief Bernard Ebbers, the man who took MCI from small telecom to international giant and stands accused of fraud, is currently underway.

Officials expect to cut 7,000 jobs and eliminate any network redundancies in the wake of the merger. Doreen Toben, Verizon CFO, said the company has audited MCI's operations and found areas that will improve the combined company's bottom line.

She said that by gaining access to MCI's national and international network, Verizon will save $100 million annually in long-distance traffic fees paid to other telephone carriers, as well as $150 million annually in capital expenditures to build out long-distance and data networks.

"As you see, these efforts go well beyond just eliminating redundancies," she said. "We are focused on creating a better, more productive company, offering improved customer service with a highly-reliable network. This will take time, and a certain amount of up-front investment, to accomplish."

Industry experts have expected an acquisition of this nature in the wake of SBC Communications $16 billion play for AT&T last month. Earlier this month, there was speculation Qwest was in the middle of talks to acquire MCI. In order to prevent any third-party interference, officials at Verizon said there is a $200 million breakup fee attached to the merger agreement.

While both SBC and Verizon still need to get the blessings of various regulatory agencies in order to close the deal, executives agree consolidation is necessary.

Ivan Seidenberg, Verizon chairman and CEO, said he doesn't expect any difficulties on the regulatory front and that the markets have already signaled their approval of industry consolidation with deals like the proposed Sprint/Nextel merger and the recent closing of the Cingular/AT& T Wireless merger.

The combination will be similar to that between a combined SBC and AT&T: a primarily regional telephone company catering to consumers and an international IP-based telecom with an emphasis on enterprise customers.

"This transaction lets us become more efficient to approach two major customer-facing activities in the enterprise market and in the local consumer broadband market, and they're not mutually exclusive," Seidenberg said. "I feel very comfortable we'll be able to do both."

Allan Tumolillo, COO of Probe Financial Associates, expects MCI shareholders to approve the merger, especially since Verizon and Qwest were the only two known bidders, and a Qwest takeover would likely have been a challenge.

"In our view, [a Qwest/MCI merger] would have less than a 10 percent chance of being a successful company and the enterprise customers would have just gone off to SBC or Verizon itself," he said. "Verizon's also got to be motivated by the idea someone else could come in and get that, whether it would be BellSouth , Bell Canada, a foreign operator or someone with a lot of money in a leveraged buyout," he said. "I don't think [Verizon] would worry about Qwest but they would worry about almost anybody else getting hold of that asset."

For Verizon, Tumolillo said, the benefits from the merger -- since MCI's cash and debt load on the balance sheet essentially cancel each other out -- come down to an immediate increase in the number of enterprise customers, an area the carrier has been trying to capitalize on in recent years.

In 2003, he said Verizon put together a sales force close to 1,000 people focused primarily on gaining enterprise customers, but layoffs and corporate downsizings hobbled the initiative, until about the third and fourth quarters of 2004.

"The real thing is they're buying [MCI] customers for $6.7 billion and I guess that, in terms of speed to market, is probably a good deal," Tumolillo said