Qwest chances to still grab MCI get mighty Slim; auto names skid on Ford woes

By Paul Deckelman and Paul A. Harris

New York, April 11 - MCI Inc. bonds were quoted higher Monday after Verizon Communications Inc. unleashed a preemptive strike to ensure that its bid for MCI will be the winning one - by buying the 13.7% stake of MCI's biggest shareholder, Carlos Slim Helu, for a cool $1.1 billion. To keep other shareholders from mutiny, Verizon may have to up its current $23.50 per share bid to equal the $25.72 it paid Slim - but its bold stroke is seen by many in the market as going a long way toward making it more difficult for Qwest Communications International Inc. to proceed with any efforts to bypass MCI management and present its higher ($27.90 per share) bid directly to the stockholders.

Elsewhere, many of the automotive supplier company bonds were lower, reacting to the latest bad news to come out of Detroit - Ford Motor Co.'s warning late Friday that its 2005 per-share earnings would come in below analysts' expectations, and that it would not meet its 2006 goal of $7 billion in pre-tax profits. One of the harder hit high-yield issues was Visteon Corp., a former Ford unit still closely tied to the fortunes of its erstwhile corporate parent.

For yet another day, there was little activity in the primary market, with no deals seen having priced by the close. However, roadshow details emerged on two offerings, for Whiting Petroleum Corp. and for Italian scooter maker Piaggio SpA.

Back in the secondary, MCI's 8.735% notes due 2014 were being quoted as high as 110, up about 1½ points over their Friday close.

One typical trader saw them at 109.5 bid, 110 offered, up from 108.25 bid, 108.75 offered on Friday, but he said that the long bond was the only one of the company's issues that was really moving around.

At another desk, those same levels were seen for the 10-year, while MCI's shorter bonds - its 7.688% notes due 2009 and 6.908% notes due 2007 - were seen up no more than a quarter to half a point, ending at 104.25 bid and 102, respectively.

MCI's Nasdaq-traded stock was only up 17 cents (0.66%) to $26.01, though on active volume of 31.7 million shares, nearly three times the norm, but the stock had been rising in price over several sessions, with equity investors obviously believing that the sweetened $23+ offer Verizon made last week, and MCI's board agreed to, would not be the last word.

Verizon announced over the weekend that it had agreed to purchase the 43.4 million shares of MCI held by various entities controlled by Mexican telecommunications billionaire Slim - said to be the richest man in Latin America and fourth richest in the world - with the sale expected to close in several weeks, subject to the necessary approvals.

In an 8-K filing Monday with the Securities and Exchange Commission, Verizon disclosed that as part of the deal, the Slim-controlled selling entities "have agreed not to knowingly take actions which would reasonably be expected to delay or prevent" the planned $7.64 billion acquisition of MCI by the New York-based regional Bell operating company, and "have agreed to support the transactions contemplated by the merger agreement."

In other words, Slim agreed not to take part in any kind of revolt against the deal that dissatisfied smaller shareholders, such as Bill Miller, CEO of Legg Mason Capital Management, were talking about last week. With such a huge block of the stock to already be in Verizon's hands, that may also make it less likely that Denver-based rival RBOC Qwest - whose offer was formally rejected last week by MCI - might still proceed with efforts to try and mount a hostile takeover try by going over the heads of management and directly to the shareholders. Qwest last week released a poll which it said proved that many MCI holders were dissatisfied with the Verizon deal.

However, Verizon's secret weapon is a double-edged sword - since it now puts the company into a position where it is expected to have to raise its bid to at least the face value of what it agreed to pay in the sweetheart deal with Slim, or possibly face a massive rejection by the lesser shareholders.

Those shareholders, with Miller the most publicly vocal among them, were already annoyed that MCI had accepted Verizon's lower offer over Qwest's $9.1 billion bid. They brushed aside the Ashburn, Va.-based long distance carrier's stated reasons that the bid by the more financially solid Verizon offered more certainty of closing, was preferred by MCI's current customers, and offered greater prospects of future financial stability, effective synergies and the ability to grow the business by tapping new markets and pursuing expensive new technologies than the offer from the debt-laden, much more financially shaky Qwest.

Indeed, Miller said in a weekend letter to MCI chief Michael Capellas that "events had made Verizon's $23.50 offer moot; this subsequent development confirms that. There can be no reason for the [MCI] Board to support an offer to MCI owners that is substantially inferior to what Verizon has just agreed to pay for a non-control block of stock."

Miller warned Capellas that shareholders such as his company - which owns about 1.6% of MCI - "would be outraged if the board did less than insist that the identical terms be made available to all other owners."

He also noted that under the terms of Verizon's deal with Slim, besides the basic $25.72 per share price, the telecom giant agreed to additionally pay Slim an adjustment a year after the deal closes in an amount per MCI share equal to 0.7241 times the amount by which the price of Verizon's common stock exceeds $35.52 per share. Published reports say this could fatten Slim's take from the sale to as much as $27 per share, or about another $55 million total.

Miller said that given the adjustment, and the fact that while Slim gets his entire payout in cash relatively soon, other holders will have to wait longer for their consideration, which is only part cash and the rest stock, "our rough calculation of the present value of what Verizon agreed to pay Mr. Slim, including the call [option on Verizon stock], is in excess of $27.00.

"For the board to continue to insist that the prior offer of $23.50 is sufficient and fair would be unconscionable" - possibly a veiled warning that somewhere down the road, the board and its members might be open to accusations of having not done their fiduciary duty to the shareholders if they do not insist that Verizon give the other shareholders the same compensation Slim is getting.

A second large smaller holder, Omega Advisors chairman Leon Cooperman (2.9%) has also stated publicly he wants the same price Slim got.

There was no immediate reaction to those calls for equal treatment from Verizon. MCI issued a statement late in the day that called the Verizon-Slim arrangement "a private transaction between those two parties. Nevertheless, MCI's board of directors remains committed to obtaining the transaction that is in the best interests of all of its shareholders."

That having been said, however, MCI also said that it has no plans to amend a poison pill that helps thwart unwanted takeovers by discouraging any unauthorized party from accumulating more than 15% of the shares.

Qwest, meantime, sniped from the sidelines that ""by entering into its deal with Mr. Slim, Verizon has both created two classes of shareholders and called into question the MCI board's previous determination that Verizon's lower offer to the other MCI shareholders was superior and fair. We believe Qwest has a superior proposal for all shareholders."

Qwest's bonds were meanwhile seen by a market source as "down a little bit, but not really much," with its 7% notes due 2009 at 94.25 and its 7¼% notes due 2007 at 95, both down ¼ point.

Auto names down

Apart from the MCI-Verizon-Qwest triangle, the automotive names were mostly spinning their wheels in a futile attempt to get out from under the pall that Ford's bad news threw over the whole sector.

A trader saw Visteon - "the closest relative" to Ford among the purely high-yield names, as a former Ford unit - getting thwacked to the tune of some 3½ points on its 8¼% notes due 2010, which fell to 90.25 bid, 91.25 offered from prior bid levels around 94.75. He also saw the Van Buren Township, Mich.-based automotive systems maker's 7% notes due 2014 fall to 80.25 bid, 81.25 offered, down from 84 previously.

At another desk, a market source saw the 7s end down about 2 1/8 points at 82, while the 81/4s lost three points to finish at 91. However, the company's 7.95% notes, scheduled to mature later this year, essentially held steady at 100.25 bid, down 1/8 on the day, as investors saw the bonds as money-good, whatever longer-term troubles the company and the larger industry have.

The source saw Dura Automotive Systems Inc.'s 9% notes due 2009 unchanged at 80, with its 8 5/8% notes due 2012 down three points at 91.

However, another source pegged the Rochester Hill, Mich.-based components maker's 9s down three points on the day at 77.

The first trader saw those bonds off two points at 79 bid, 80 offered, from 81 bid, 82 offered.

He saw Arvin-Meritor Inc.'s 7 7/8% notes due 2009 lose a point to 99.25 bid, 100.25 offered, while at another desk, the Troy, Mich.-based automotive integrated systems maker's 8¾% notes due 2012 were seen down two points on the day at 103.5 bid.

The bonds of Arvin's Troy neighbor, Collins & Aikman Products Co., however, were seen little changed, perhaps as the company basked in its own good news from last week, when it got some covenant relief from its lenders on its senior secured credit facility, and got a commitment for on an additional $75 million term loan financing.

Collins & Aikman's 10¾% senior notes due 2011 were seen unchanged at 80, while its 12 7/8% subordinated notes due 2012 were likewise unchanged at 46. The company's 9¾% notes due 2010 were down ¼ point at 106.5.

EaglePicher gains but trades flat

One automotive supplier name seen higher was EaglePicher Industries Inc. - after the company filed for protection from its creditors under Chapter 11.

That sent its 9¾% notes due 2013 up to 65 bid, 66 offered, from prior levels at 60 bid, 61 offered. However, where the notes had previously been trading with their accrued interest, the notes are now trading flat, or without that interest, as is customary following a bankruptcy filing, so, a trader said, "in reality, they were pretty much unchanged," since loss of the accrued interest negates any nominal gains in a bond's price.

At any rate, the trader said, the Ford news "had a much bigger impact than Eagle's filing," which had been generally expected.

The Ford news, on the other hand, shocked the socks off the market, which had come to view the Number-Two U.S. carmaker as a considerably more solid company than its larger rival, General Motors Corp., which stunned the financial markets last month with its warning that full-year 2005 profits might only total $1 to $2 per share, versus prior estimates as high as $4 or $5.

After the market closed on Friday, Ford warned full-year earnings will only come in at about $1.25 to $1.50 per share, down from the $1.75 to $1.95 per share previously expected. Ford also said it doesn't expect to reach its goal of $7 billion in pretax profits by 2006.

"Historically high prices for steel and crude oil, escalating health care expenses and a weak U.S. dollar presented formidable challenges as we entered 2005," said the company's chief financial officer, Don Leclair, in a statement late Friday.

"Throughout the first quarter we saw those and other business factors worsening, and as a result in mid-March we announced that we expected our full-year performance to be at the lower end of the guidance we provided in January 2005. The company's analysis of recent market trends, which include the prospect of higher and sustained gasoline prices and continued aggressive pricing actions by competitors, have led us to conclude that further challenges lie ahead. Accordingly, we have revised our earnings outlook for the full year."

That caused Standard & Poor's and Fitch Ratings, which rate the company's long-term debt at BBB- and BBB+, to revise their respective outlooks for Ford to negative from stable, meaning the bonds of the world's largest corporate debt issuer could be dumped into junk at any time. Moody's Investors Service, taking a more restrained view, last week said that it had placed Ford's Baa1 rating on review for a possible downgrade.

Bid yields on Ford's 7.45% notes due 2031 were seen having widened out by about 35 basis points Monday, to a spread of 465 bps over comparable Treasuries, although that tightened a little later in the session to about 30 basis points, or a 460 bps spread.

Primary sees no pricings

While sources said Monday that the high-yield market outside the auto names seemed to be taking Friday's news about Ford Motor Co. in stride, the primary saw no business price during a session that saw secondary levels ease somewhat, according to sources.

Noting that Standard & Poor's lowered its outlook on Ford's BBB- debt to negative on Friday, one high yield sell-sider said simply: "That's the other shoe that just dropped, but I don't think it really took anyone by surprise.

"If you think about Ford and GM debt combined it could swamp the high yield. And people are beginning to talk about GM's debt as though its fall to sub-investment grade is almost a certainty.

"Of course just because those bonds may fall to junk does not mean that everybody in junk is going to want to own them.

"What it does mean, though, is that there are a lot of people who do own them who are going to be forced to sell them."

Negative auto news priced in

Elsewhere sources said Monday that based on trading activity the markets seemed to be taking Standard & Poor's lower outlook on Ford in stride.

One high-yield syndicate official said: "You did not hear a whole lot of noise about that on the trading floor this morning.

"After the news about GM I think that this kind of negative news from the automotive sector may be priced in."

The defensive energy sector

Only one dollar-denominated bond offering emerged Monday from the investment banks.

Denver, Colo.-based Whiting Petroleum Corp. plans a two-day roadshow for its $220 million registered offering of eight-year non-call-four senior subordinated notes (expected ratings B2/B-), with pricing expected to take place this Wednesday.

Merrill Lynch & Co. and Lehman Brothers will be joint bookrunners for the debt refinancing deal.

Whiting is an oil and natural gas acquisition, exploration and exploitation company, and hence is thought to inhabit what market sources refer to as a "defensive sector" in times of rising fuel costs and volatility in the bond markets.

It is thus interesting to note that since the March 22 Federal Reserve Federal Open Market Committee meeting - which indicated a cautionary tone about inflation risk to the U.S. economy that was said to have intensified a sell off already underway in high yield - of the nine issuers that have sold high-yield bonds, two were energy companies.

Last Tuesday, KCS Energy, Inc. priced an upsized quick-to-market $100 million add-on to its 7 1/8% senior notes due April 1, 2012 (B3/B-) at 100.625 via Credit Suisse First Boston.

And on March 23 - one day after the FOMC meeting - Pogo Producing Co. priced a $300 million issue of 6 5/8% 10-year senior subordinated notes (Ba3/BB) at 99.10 on to yield 6¾%, via Goldman Sachs & Co, also in a drive-by.

Euro calendar tops €1 billion

The slate of euro-denominated deals continued to build on Monday as Italian motorcycle and scooter company Piaggio SpA announced that its subsidiary, Piaggio Finance, will start a roadshow during the present week for a €150 million offering of seven-year non-call-four notes (B), which are expected to price during the week of April 18.

Lehman Brothers and Deutsche Bank Securities are the bookrunners for the debt refinancing deal.

Piaggio joins prospective euro-denominated issuers Damovo Group III SA, with €350 million in two tranches (B1), expected to price Friday via Deutsche Bank Securities.

Elsewhere Central European Media Enterprises Ltd. has €350 million in two tranches expected to price next week via JP Morgan, Lehman Brothers and ING.

And French water treatment company Saur Group SA is now on the road with €265 million of 10-year senior notes, via BNP Paribas, which it expects to price late this week or early next.

Late-week business

One sell-side source noted that despite a reasonably healthy slate of deals expected to price during the present week, only one transaction seems to be within view - the above-mentioned deal from Whiting Petroleum, expected to price Wednesday after a brief Tuesday-Wednesday investor roadshow.

The rest of them, approximately $1.7 billion of dollar-denominated business according to the Prospect News forward calendar, are listed either as "Friday business," or "late week business."

At Monday's close no price talk had been heard on any of them, according to the sell-side source.

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