Qwest Dons Collar for MCI

Updated from Feb. 24

Qwest (Q Quote) turned up the heat on MCI (MCIP Quote) Thursday, following through on an oft-made threat to raise its bid for the long-distance telco.

Qwest modified the terms of its $8 billion cash-and-stock offer for MCI in a second attempt to derail the pending deal between MCI and Verizon (VZ Quote).

In a letter to MCI's board of directors Thursday, Qwest said it would adopt a so-called collar that guarantees MCI $15.50 in Qwest stock for each MCI share. Qwest also accelerated the cash payment to shareholders immediately following an approval vote.

But investors weren't impressed, sending MCI shares down in late trading.

MCI agreed last week to merge with New York telco Verizon in a deal valued between $5.3 billion and $6.8 billion, depending on how you count the dividends Verizon would pay out of MCI's kitty. In doing so, MCI snubbed Qwest, which had made an earlier $23-a-share cash-and-stock bid.

Qwest put its latest offer at $24.60 a share, while Verizon's rounds out at $20.75, including the planned dividends.

By Qwest fixing the share price with a collar, MCI is more protected from a drop in Qwest's stock value. And observers see the enhanced dividend payment, which would come from MCI's piggy bank, as an enticement for shareholders to approve the deal.

The revised bid calls for total dividends of $6 per share paid by MCI, $3.10 in cash per share from Qwest and $15.50 in stock. The previous bid called for the continuation of $1.60 per share in annual dividends, $7.50 in cash, and a 3.735 Qwest shares for each MCI share.

MCI said it had received the offer and promised to review it thoroughly. In a statement Thursday, Verizon said it "has a signed agreement with MCI and a proven track record of completing transactions that create value for shareholders, customers and employees."

The collar is a key part of the Qwest bid, since many observers say that MCI chose Verizon over Qwest in large measure because of Verizon's financial heft and general stability. By protecting MCI investors against a modest decline in Qwest stock, Qwest can make its new offer appear less risky than the previous one, which MCI rejected without comment.

Still, Qwest faces an uphill battle. One investor who holds both MCI and Qwest shares said the revised bid came up short of the figure he was seeking. "At this point, if I'm MCI's board, I'm not sure I'd take this offer," the hedge fund manager said. "And I'm not sure what this means for Qwest's future."

Meanwhile, MCI's board appears to have been stung by criticism from shareholders that it failed to do its duty in fully considering the first Qwest bid.

"MCI's Board will conduct a thorough review of the Qwest offer, as it has with all previous offers," the company said in a Thursday press release.

Qwest continued pushing the merits of its deal vis-a-vis a Verizon linkup. "With respect to synergies, Qwest advisers and management believe -- and it would appear a substantial number of MCI stockholders agree -- that there are significant cost synergies available in a Qwest/MCI merger," Qwest said in a letter to MCI's board.

But observers and analysts say the MCI board likely took the original Verizon offer because it aligned the company with a much stronger player in the industry. And even though Qwest came up with a somewhat higher bid, its strength as a company is still in question.

Qwest operates in the red and already has $16.7 billion in debt, and a mere $1.8 billion in cash. To swing this deal, the company will likely have to take on even more debt. Though observers say the company has arranged suitable backing from bankers and investors, the stakes are high.

MCI shares fell 41 cents in after-hours action to $22.80, while Qwest shares were flat at $4.21 and Verizon's rose 31 cents to $35.81.