Qwest Keeping Tabs on MCI

Despite being spurned for a lower bid to buy MCI , executives at Qwest said Tuesday they are still keeping their options open.

Verizon announced Monday that its board of directors and those from MCI had agreed to a $6.7 billion acquisition, roughly $600 million lower than a reported $7.3 billion Qwest bid.

Despite the fact that MCI is favoring Verizon at the moment, Richard Notebaert, Qwest chairman and CEO, told analysts at the company’s fourth quarter and year-end 2004 financial conference that Qwest wasn’t out of the picture yet, though he wouldn’t go into details.

He wouldn’t even acknowledge Qwest had a bid on MCI for that matter, referring all his comments to press accounts he’s read of events. But he said he was surprised MCI directors opted for the lesser bid.

“Now, I have a great deal of respect for the decisions that boards make, and MCI’s board has made a decision,” Notebaert said. “We will look at lots of opportunities and keep all of our options open as we go forward. We’ll just have to see how this unfolds … a billion dollars is a lot of shareholder value to leave on the table, but again, that decision’s been made, so now we’ll move forward.”

Analysts aren’t keen on Qwest’s chances to overtake Verizon’s bid, even
though they are reportedly offering substantially more money up front.

Daryl Schoolar, a senior analyst at In-Stat, doesn’t think the chances are good for Qwest to take MCI away from Verizon and said Notebaert’s comments to keep the carrier’s options open is the kind of optimistic statement to be expected from a CEO talking in front of the press.

“It’s pretty obvious from watching MCI how much they wanted to go with
Verizon and that Qwest was the last-opportunity option, kind of a stalking horse to drum up interest,” Schoolar said. “Unless something happens with the Verizon deal, I’m pretty sure the Verizon deal will go through.”

According to Eric Paulak, a managing vice president at research firm
Gartner, Verizon’s long-term prospects are much brighter than Qwest’s, which exerts little influence outside its operating region and carries too much baggage with it: namely, a lingering debt load that doesn’t allow for much growth.

“What does Qwest offer MCI in the long term? The answer is not a lot,”
Paulak said. “The major reason Qwest was looking at MCI was to fix its books, not so much in terms of its business strategy.”

Paulak suggested that MCI was Qwest’s best chance to find a partner to compete in the space; not a lot of companies, he said, find the idea of being acquired by Qwest a desirable one. What’s more, not many large companies are going to look at Qwest as an attractive buyout target — given its 117 percent debt ratio by his last count — if it can’t raise the money to pay off its debts.

Qwest revenues declined 3.4 percent to $13.3 billion in 2004, dropping from $14.3 billion in 2003, according to the final report released by the carrier Tuesday. Cash flow for the year was $158 million, though the company was able to pare its loss per share to 8 cents from last year’s loss per share of 23 cents.

Officials were optimistic about the results, saying the troubled telecom carrier was able to reduce costs and improve its revenue trends. The fourth quarter’s 1.7 percent revenue decline from the fourth quarter in 2003 is the company’s lowest year-over-year decline in eight quarters, they said, and they continue to cut operating costs to improve margins.

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