Verizon wins battle for MCI with $6.75bn bid

Verizon Communications, the largest telephone group in the United States, swooped on its smaller rival MCI yesterday, agreeing to pay $6.75bn (£3.6bn) in cash, shares and dividends for the company which, under its former identity of WorldCom, gained notoriety as the world's biggest bankruptcy.

The deal is the latest in a series of gigantic mergers in the telecoms sector in the US and comes after weeks of speculation about who would acquire the long-distance carrier, which received an offer this month from Qwest Communications.

The agreement between MCI and Verizon came after moves at the weekend by Qwest to increase its bid to $7bn from $6.3bn. MCI is understood to have agreed to the lower offer from Verizon because it felt that Qwest's finances would be stretched too far by a deal.

Qwest could still try to block Verizon's deal with MCI, though MCI's agreement with Verizon contains a $200m break-up fee, which could discourage others from trying to muscle in.

MCI's shares fell in morning trading in New York, reflecting some investors' unhappiness with the price of the bid. Verizon's stock rose in value after the company said it would be able to slice 7,000 jobs from the combined 250,000 workforce.

As WorldCom, the company ran out of cash in 2002. Its former chief executive, Bernie Ebbers, is on trial for allegedly orchestrating an $11bn fraud and could be sent to prison for more than 30 years.

Despite putting much of its financial woes behind it when it emerged from bankruptcy a year ago, many analysts think MCI is too small to compete effectively on its own. Under its chief executive Michael Capellas it has been looking for a partner. Extra impetus was given to the searchlast month when SBC Communications announced it was buying AT&T, the largest long-distance phone line provider.

Mr Capellas said of the deal with Verizon: "At the end of the day, there's no question our future is brighter together."

That deal put Verizon and other local line phone companies under pressure, because MCI, the second-biggest long-distance provider, represented the last chance to gain a large chunk of this lucrative market, which includes many contracts with corporate clients.

Ivan Seidenberg, Verizon's chief executive, said: "This is the right deal at the right time."

MCI shareowners will receive 0.4062 shares of Verizon stock for each share of MCI, worth $4.8bn and equivalent to $14.75 per MCI share, based on Verizon's closing price on Friday. MCI shareholders will also receive $1.50 per MCI share in cash, totalling $488m. Verizon said this was subject to adjustment at closing and may decrease depending on bankruptcy claims associated with MCI. Verizon will assume MCI's net debt of about $4bn.

Quarterly and special dividends of $4.50 per share, worth $1.46bn, will also be given to MCI shareholders, which includes a 40 cent-per-share quarterly dividend and brings the total value of the transaction to $6.75bn.