Verizon acquires MCI

The loud "thud" that echoed through the telecom industry this morning is the other shoe dropping.

As predicted from almost the first minute that SBC Communications said it would acquire AT&T, Verizon has now acquired MCI for $4.8 billion in equity and $488 million in cash. The boards of directors of both companies approved the deal, which will pay MCI shareholders 0.4062 shares of Verizon common stock for each common share of MCI Plus $1.50 in cash per share. The common stock is the equivalent to $14.75 per MCI share, based on Verizon's closing price on Friday, Feb. 11.

In addition, MCI will pay its shareowners quarterly and special dividends of $4.50 per share, worth $1.463 billion. This includes a 40-cent-per-share quarterly dividend approved by the MCI Board on Friday, Feb 11.

In total, the transaction values MCI shares at $20.75 a share, or $6.746 billion.

In addition, Verizon will assume MCI's roughly $4 billion in debt. The entire deal must still be approved by MCI's shareholders and, like the SBC-AT&T deal, faces regulatory approval from state regulators in which Verizon holds local telephone authority.

According to published reports, MCI turned down a higher offer from Qwest Communications because its board felt Verizon was a better strategic fit.

Verizon Chairman Ivan Seidenberg declared the acquisition to be "the right deal at the right time."

"We have been evaluating a transaction with MCI for some time, and now we have the opportunity to reach an agreement at the right price that works for both companies and at a time when MCI is gaining momentum," said Verizon Chairman and CEO Ivan Seidenberg in a published statement. "It is a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies."

MCI's roughly 10,000 enterprise customers are the primary target of the deal. The company offers an extensive array of data services, including an expanding IP-based offering.

Acquiring MCI will allow Verizon to expand its enterprise base "less expensively than if we had continued on a path of organic growth," said Seidenberg. "The acquisition will significantly enhance our customer service and competitive positioning by giving us a global reach, a suite of IP-based and value-added services, and a powerful, broad base of large-business and government customers."

Verizon's shareholders will feel a pinch in the first few years. The deal is expected to have an approximate 10-cent-per-share dilutive impact on Verizon's earnings per share, separate of acquisition costs and amortization of intangible assets. Verizon expects the transaction to be essentially breakeven in year three, and cash flow positive by year three.

Verizon expects to spend between $1.0 billion to $1.5 billion in expenses and $2.0 billion in capital during the first three years in order to maintain and upgrade the MCI assets.

In announcing the deal, Verizon said it expects a net annual run rate of $1 billion in pre-tax savings in the third full year after closing.