GTE may bid for MCI

GTE Corp.'s reported $25 billion cash offer for MCI Corp. Wednesday is just the latest in a staggering series of acquisitions and proposed mergers in the ever-consolidating telecommunications industry.

The Dow Jones Markets news service first reported the offer late this morning; Bloomberg and Reuters later cited sources confirming GTE's intention to offer a bid for MCI. Officials from GTE and MCI, as well as WorldCom and British Telecom, two other MCI suitors, would not comment on the story.

MCI Corp., which has been heavily courted by WorldCom Inc. and British Telecom in the past two months, finds itself in the enviable position of choosing between several lucrative offers.

Last week, acquisition-happy WorldCom offered $33.5 billion worth of common stock in exchange for all outstanding MCI shares.

But GTE's offer might be too good to refuse considering that WorldCom's stock is trading near its all-time high of $37.94 per share leaving open the possibility of diminished returns depending on the stock's performance.

"Cash is cash," said Scott Wright, an analyst at Argus Research. "It's money you can put in your pocket. You can't put a WorldCom share in your pocket. It's a very tempting offer."

GTE officials reportedly have scheduled an impromptu meeting Wednesday afternoon to mull over the latest offer.

Louis Ehrenkrantz, an analyst at Ehrenkrantz King Nussbaum, said GTE would surely suffer dire consequences if MCI accepts the offer.

"It's the stupidest thing I've ever heard," he said. "It will cost so much and cuts so deep into their balance sheet that GTE will choke on it for years to come. It's just like when Viacom made its cash offer for Paramount. They had to borrow the money and now they're selling off assets just to get out of debt."

Wall Street's early reaction to the rumor mirrored Ehrenkrantz concerns. GTE was down $2.19 per share to $48 in afternoon trading despite posting better-than-expected sales and earnings in its third quarter.

When the news broke, trading was suspended on MCI shares. Once trading recommenced, the stock shot up $1.44 per share to $36.75.

"This country has gone absolutely insane with acquisitions at any price," Ehrenkrantz said. "The market is a sane place and you can tell from just the early trading today how it feels about this deal."

James Hem, an analyst at Olde Discount, said the proposed deal would give GTE a strong foothold in local and international customers, but questioned its timing.

"What makes MCI any more attractive today than it was eight or 10 months ago when GTE was originally rumored to be interested?" he said. "It doesn't make a lot of sense."

MCI does have an enticing customer base that tends to spend more on telecommunications services than its competitors.

According to International Data Corp., MCI users spend between 10 to 15 percent more each month in long distance and online charges than customers at AT&T or Sprint.

"MCI has desirable customers who are more technologically savvy," said Gigi Wang, an analyst at IDC. "MCI customers are typically younger and use the Internet more than the core customers at AT&T."

Analysts said MCI's board would likely accept the deal, but wonder how GTE will raise such an enormous amount of cash.

"They could omit their stock dividend to pay for it, but they aren't going to do that," Ehrenkrantz said. "So they're going to have to borrow it. And even at these low interest rates, it will kill them. They'll be paying it off for years and years to come."

On Wednesday, GTE reported strong third quarter earnings driven by the continued excellent performance of its core businesses backed by strong growth in new service initiatives.

Earnings per share from core operations increased 10 percent from the year ago quarter to 86 cents. Including the effects of the previously announced data initiatives, reported earnings per share of 79 cents was one cent higher than the prior year's 78 cents.

During the quarter, consolidated revenues and sales increased by 11 percent to $5.94 billion. Excluding the $127 million of new revenues related to the new data initiatives, consolidated revenues and sales grew 8.8 percent, GTE said.

"We're quite please with their results, especially the growth they enjoyed in their vertical services market and cellular market," Wright said. "We've set a target price of $58 per share on the belief that the market doesn't recognize its growth potential. If this deal goes through, it shouldn't have the dillutive effect that a company with a higher valuation might expect."

And what becomes of WorldCom?

"I wouldn't be surprised to see them either try to come back to MCI with a different offer, maybe a cash offer or abandon MCI and try to work out a deal with BT," Wright said. "Things are happening so quick in this market that if you blink, you might miss the biggest merger in history."