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Verizon Communications Inc. agreed Monday to pay $6.7 billion in stock and cash for MCI Inc. in a deal that will combine one of the largest local phone companies in the United States with the second-largest long distance phone company. Verizon Chairman and CEO Ivan Seidenberg and MCI chief executive Michael Capellas used words like “smart,” “achievable” and “compelling” to describe the deal. It will also give New York-based residential phone giant Verizon a covetted base of large corporate and government contracts, one of Ashburn, Va.-based MCI’s strengths. Verizon will pay about $4.8 billion in stock and $488 million in cash. However, MCI will also contribute $1.46 billion from its cash hoard to pay dividends to investors, putting the equity value of the transaction at more than $6.7 billion. The companies expect MCI to have about $4 billion in net debt. Adding the assumed debt, and discounting the cash that is coming off MCI’s books, Verizon’s total obligation comes to about $8.8 billion. For years, executives at Verizon said, “crime shouldn’t pay,” in reference to the bankruptcy that allowed MCI to clean its books despite the mantle of fraud brought on by former management. However, the combination of MCI’s balance sheet and SBC Communications Inc.’s $22 billion acquisition of AT&T Corp. on Jan. 31 changed their minds. Verizon began talks with MCI when Denver-based telecommunications provider Qwest Communications International Inc. made overtures to MCI on Feb. 3. The combination of Verizon and MCI will present strategic challenges to rival local phone providers BellSouth Corp. of Atlanta and Qwest, who will have limited options if they seek to increase their scale through acquisitions. Verizon retained Bear, Stearns & Co. Inc. as its banker, and Debevoise & Plimpton as its main counsel. Cleary Gottlieb Steen & Hamilton was the buyer’s international antitrust lawyer. MCI retained Greenhill & Co., Lazard and JPMorgan Chase & Co. Davis Polk & Wardwell was MCI’s law firm, and Steptoe & Johnon did regulatory work. The transaction carries a $200 million breakup fee. Copyright �2005 TDD, LLC. All rights reserved.

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