Following the announced merger of SBC Communications (NYSE:SBC) and AT&T (NYSE:T) -- or as one wag put it, Ma Bell has decided to "move back in with the kids" -- rumors have been swirling over who will be the next takeover candidate. Most eyes fell immediately on Motley Fool Inside Value pick MCI (NASDAQ:MCIP).
Today's online edition of TheWall Street Journal has it that Qwest Communications (NYSE:Q) is in talks with the former WorldCom progeny for a $6.3 billion deal. Verizon (NYSE:VZ) has also been mulling a bid for the telecommunications company, one that sports some 100,000 miles of network connections serving 150 companies on virtually all seven continents and employs more than 69,000 people.
Qwest offers phone service in 14 Western states and is valued at about $7.6 billion, slightly more than MCI. While details of the merger are still unclear, Qwest is already saddled with more than $17 billion in debt. How much more would the merger add to the balance sheet? Another possibility being considered for MCI is for its largest shareholder, Carlos Slim, to take the company private.
When Philip Durell recommended MCI in the inaugural issue of Inside Value, he saw the cash-generating potential of the company, as apparently did Leucadia (NYSE:LUK), which made a bid to acquire up to 50% of MCI's stock last year. Philip forsees vastly improved free cash flow and a fair value at $26 a share. Thus, Qwest's bid at roughly $19 a share offers no premium to current MCI shareholders and would seem to be an attempt to get the company on the cheap.
The consolidation under way in the telecommunications could result in there being just four major carriers players left when the dust settles, according to market analysts at Gartner. Interestingly, they view Qwest as a possible takeover target itself, along with Sprint (NYSE:FON), which is said to be in talks with wireless company Nextel (NASDAQ:NXTL) on a possible merger of its own.
It may be that a merger of MCI with someone else is inevitable, but that does not mean shareholders must accept the first bid that comes along. Philip believes that due to the uncertainty in the telecom industry these days, a more reasonable takeout price would be $22-$23 a share, or about 85%-90% of the intrinsic value he calculated. As he noted in his recommendation, MCI represents a turnaround story that is just getting started. Of the possible partners making the rounds of the rumor mill, Qwest would appear to be a weak choice. A bid by Verizon might be better and would make more sense since it has more to lose in its rivalry with SBC.
With Ma Bell in her dotage, and the kids all grown up now, one can look wistfully back on the vastly different landscape that that was the telecom industry of her youth.
Read more about the tumultuous changes occurring in telecommunications:
- Saying "No" to AT&T?
- SBC's AT&T Buy No Blunder
- Troubles in Telecom
- Bless Leucadia's Heart
- WilTel. Or Won't It?
Fool contributor Rich Duprey is often thought to be in his dotage. He does not own any of the stocks mentioned in this article. Talk about MCI, Qwest, and the telecommunications industry on our discussion boards (free trial required).
