Qwest Reaches its Breaking Point

Well, it looks as if Qwest has finally reached its breaking point and I say this becasue of the following. Certain big shareholders of MCI are now ready to loan Qwest some money so the company can increase its bid for MCI. As far as I can tell, Qwest can only afford to pay $27-28 for MCI, but investors like Omega’s Lee Cooperman are now ready to fork over hundreds of millions so Qwest can take out MCI at $30. In effect, Cooperman and his buddies seem willing to pour some of their MCI profits back into Qwest on terms that I suspect are probably pretty favorable. Who can blame them? Many own MCI from the mid-teens, so pouring some of those profits back into the company is probably digestable, especially if it means the bulk of their shares get taken out at a higher price then Verizon is willing to offer. This has become a very odd situation that doesn’t exactly comport with what I learned in risk arb 101. In a perfect risk arb world, these investors would be shorting Qwest and not moving in to be the company’s lender of last resort. But this is not a perfect world and this is certainly not your mother’s typical bidding war. This one has been usual from the start and it just keeps getting creepier.

I am now curious what the folks at Verizon think of all this. If I had to guess, I would say Verizon CEO Ivan Seidenberg is probably tiring of all this chirping he is hearing from his much smaller brother out in Denver. But at least at this point, he knows Qwest has hit its breaking point. Clearly, if Qwest is borrowing from Peter to pay Paul, they have no more ability to sweeten their offer. So this is what I do if I am Ivan. I take my bid to $26-27 (they paid 25.72 for a big block the other day) and give MCI one business day to either crap or get off the pot. So long as he can put an offer together that is within 10 percent of Qwest, I think he stands a good shot of getting MCI. If that happens, Qwest is a goner. First stop is $2.50 and the train won’t stop until it breaks two bucks. But what if VZ fails? Qwest should pop, but how much? I am sure the hedgies will step in to pound a rally, but where will this fight be waged. Four bucks seems like a good place to hold the fight.