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Merger turning up the heat on Qwest
By Jeff Smith
Rocky Mountain News
Tuesday, March 7, 2006

Qwest Communications will be under pressure soon to boost its size to more effectively compete in a consolidated telecommunications industry, experts said Monday.  "I don't think their prospects are very bright without more scale," said Ray Gifford, the former chairman of the Colorado Public Utilities Commission and president of The Progress & Freedom Foundation, a Washington think tank.

Gifford and others don't discount the possibility that Verizon Communications could go after Qwest as a defensive maneuver following the announcement that AT&T and BellSouth will merge.

"I think that's the most likely play" if Qwest were to be acquired, said Charlotte Yates, chief executive officer of Telwares, a telecommunications-services company.  "But I think (Verizon) might let it languish a bit."

Qwest, without its own wireless operation, doesn't hold the same attraction as a company such as BellSouth.

AT&T has also been mentioned as a possible buyer of Qwest.  "That would give them a true coast-to-coast operation," Yates said.  But AT&T obviously has BellSouth to digest first.

In the meantime, experts say Qwest has to be prepared to go it alone.

"It's not clear that Qwest is a near-term candidate to be bought by anyone," said Jerry Paul, managing partner of QCM Absolute Return Fund in Greenwood Village.  "I still think debt reduction needs to be a priority."

Some analysts said the nearly $15 billion debt load, combined with Qwest's recent surging stock, also makes the company too expensive to be acquired right now.

Gifford questions that argument, noting the debt already should be factored into Qwest's stock price, or market value.

But Gifford did say he believes Qwest needs to strike a balance between improving its financial structure - so the telco is even more attractive to a potential merger partner - and investing enough in its network "to meet the competitive onslaught from cable.  They really do need to have the capital to invest or they'll die a slow death."

Gifford sees the current wave of Bell mergers as mostly defensive moves against cable companies, with the next consolidation wave likely to involve content and application providers.

Communications transport through fiber-optic pipes has essentially turned into a commodity business, he said.

"Unless (the Bells) own their own content, they're not going to get that much of the consumers' dollars," Gifford said.  "The consumer will pay for sports, not for a pipe."

Last week, Qwest Chief Executive Dick Notebaert said the Denver telco would consider buying a company outside the telecommunications field.  But since then, Qwest officials have said that Notebaert was just answering a hypothetical question.

If Qwest did merge with a content company, Notebaert would be ahead of his time, Gifford said.  "And Qwest is small enough that (such a deal) probably wouldn't create a groundswell of opposition."

http://www.rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_4520395,00.html