Report: Verizon makes play for MCI

The news of a possible Verizon-MCI deal comes a week after the telecommunications industry was shaken up by the announcement that SBC Communications would buy AT&T for $16 billion. The SBC-AT&T deal has changed the telecommunications landscape, pitting the three remaining regional telephone companies--Verizon, BellSouth and Qwest Communications International--against each other in several markets.

Last week, Qwest made a play for MCI by offering $6.3 billion for the company. MCI, which emerged from bankruptcy last year, has kept mum on the Qwest offer. Analysts speculate it has been holding out for a better offer from Verizon.

"It seems pretty clear that MCI leaked the talks with Qwest to get Verizon more interested in doing a deal," said Tavis McCourt, a telecom analyst at Morgan Keegan.

Sources say that Verizon has not made a formal offer, but it is considering roughly matching Qwest's bid. The deals are still tentative and could break up, sources added. The rumored informal offer was first reported on Thursday in The Wall Street Journal.

Industry insiders have speculated that Verizon, the strongest of the Baby Bells, has been looking to pair up with a long-distance carrier since SBC announced the AT&T acquisition. MCI and Sprint have been cited as the only two contenders.

While a deal with Sprint would help boost Verizon's wireless business, analysts said it would be fraught with potential regulatory hurdles. The pending merger between Sprint and Nextel would only complicate matters further, they added.

MCI doesn't have wireless customers to offer Verizon, but its nationwide and global IP networks could help the company move into new markets and compete head-to-head with the merged SBC-AT&T. In particular, this deal would give Verizon access to MCI's business customers--a market in which Verizon has had little success. Enterprise customers could also help Verizon grow its wireless business.

"MCI is a much cleaner deal for Verizon," McCourt said. "And even though the enterprise telecom and long-distance markets have been disastrous for the last few years, there are some longer-term benefits for Verizon expanding its business with the MCI network."

For nearly a week, MCI kept quiet after Qwest reportedly made its offer for the company. Analysts agree that Verizon is a much better candidate. Qwest, which is the smallest of the Baby Bells, offers MCI investors less growth opportunity. The company serves a thinly populated 14-state area. What's more, it is saddled with financial troubles, including a $17 billion debt load.

"Verizon is a stronger company with a much better balance sheet," said Brad Wilson, an analyst with Legg Mason. "I think the only way that MCI shareholders would go for a deal with Qwest is if Verizon didn't want it."