The battle for control of US telecoms operator MCI has taken anotherwith an $28 billion cash deal - bids against BT and Worldcom. twist with an unexpected $28 billion (#17.5 billion) cash bid from GTE - the largest cash offer in US corporate history - turning the takeover of MCI into a three-horse race with Worldcom and BT.
GTE's $40-a-share cash offer was made in a letter from chief executive Charles Lee to MCI chairman Bert Roberts earlier this month. Lee said that the proposed merger would result in a company with combined revenue of $40 billion, 21 million local lines and 24 million long-distance lines.
Lee has offered to make Roberts the vice chairman of any merged entity.
MCI said it would consider the latest bid alongside the existing offers from Worldcom and BT, which are worth $30 billion and $21 billion respectively.
In a statement issued last week the company confirmed: "MCI's board will meet shortly to review all issues and options with respect to the GTE proposal and the unsolicited proposal received from Worldcom in the context of the company's strategic merger agreement with BT."
Despite the emergence of a viable third player in the takeover, Worldcom remained publicly confident that its own unsolicited bid would prevail.
Speaking at the Wall Street Journal Technology Summit in New York, vice chairman John Sidgmore predicted that the new bid would cause "tremendous distraction" at MCI, but added: "I'm highly confident that our bid will carry the day ... we intend to stay the course."
BT - which already owns 20% of MCI - denied that this and the earlier Worldcom bid had shot down BT's planned global expansion strategy. "BT's global strategy remains robust, aggressive and deliverable," a company spokesman insisted.
Speculation was growing within the last fortnight that a successful GTE bid would provide BT with a "next best thing" alternative to a full takeover of the company, which now seems almost certain to fail. The talk within the industry was that a three-way alliance might be forged between BT, MCI and GTE, although many observers noted the main stumbling block would be BT's reluctance to assume the role of junior partner.
Lee added fuel to such talk by confirming that he had been talking to Roberts and BT chairman Iain Vallance about such a three-way deal. "Iain, Bert and myself have talked informally on a number of occasions about models for this type of combination," he said. "The idea is to create a pro-competitive force domestically and at the same time work with BT to create a great global company."
GTE president Kent Foster confirmed that he would like to do a deal with BT. "We'd very much like them to participate in this proposed merger," he said. "Obviously we think they are a valuable asset in this overall package of assets. But we obviously don't know what their position is."
If GTE succeeds in its bid, BT might swap shares with GTE/MCI or take cash for its 20% stake and use that to buy a stake in any larger GTE/MCI venture. There has been some speculation that the three companies might form a new global venture, 50% owned by BT and 50% owned by GTE/MCI, which would see BT servicing Europe and leaving the US to the others.
One party that was distinctly unhappy with the latest turn of events was AT&T, which according to industry speculation had been trying to do a deal with GTE to counter any MCI-Worldcom merger. In a terse statement, AT&T chastised GTE, demanding: "We fully expect the government to require GTE to get serious about opening its local markets to real competition and to stop erecting legal and economic roadblocks to the speedy implementation of the Telecommunications Act."
All eyes must now be on the MCI share-holders. Worldcom's offer is worth the most, but GTE is offering the comfort factor of hard cash - albeit less of it. The GTE offer as outlined in the letter would involve paying shareholders $40 a share in cash, although the company added that it was willing to explore the idea of paying a combination of cash and stock.
If the perception is that Worldcom's stock might not retain its value post-merger, shareholders may opt to take the money and run.
On the other hand, GTE may worry shareholders by making a cash bid that it currently does not have the funds to finance. The company has less than $1 billion in cash to play with and would have to borrow heavily to pay for its acquisition. It already has $17 billion of debt. There would also be tax implications for shareholders landing any kind of lump sum.
GTE admitted that the funding was not in place to proceed with deal, but insisted that its financial advisers at Goldman Sachs do not see this as a problem because the company has a cash flow of $9.2 billion. MCI's cash flow is $4 billion. GTE would probably raise the money in the form of a bridging loan from a consortium of banks.
Shareholders on the Silicon Investor bulletin board were delighted by the prospect of a bidding war. "Isn't it great to be wanted by so many," said one stockholder. "This will give all shareholders something to do pondering which deal is the best. It's almost better than chess. Do I take door number one without much in there (BT) or door number two with lots of stock in a fast company (Worldcom), or lastly, do I take door number three (GTE) with the cash?"
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