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Qwest may be buyout Bell of the ball
Equity firms are running the numbers to see if the slipper fits. But high debt could be a sticking point.
By Beth Potter, Staff Writer
Denver Post
Thursday, March 9, 2006

Private-equity firms may be prompted to take a look at Denver-based Qwest in the wake of the announcement this week that AT&T is buying BellSouth.

Tad Kelly, a managing partner at private-equity firm CHB Capital Partners in Denver, said some equity firms are likely crunching the numbers to see if a buyout of Qwest could work.

"This AT&T-BellSouth thing does put pressure on the smaller, so-called independents," he said.

Bigger funds such as those controlled by Goldman Sachs and Carlyle Group are flush with cash, and equity firms are eager to put the money to work.  Well-known businesses such as Toys "R" Us and QwestDex have drawn bids from equity funds in the past.

As a rule of thumb, investors are looking for companies that generate high free cash flow and have low debt.  Qwest has about $900 million in free cash flow and $15 billion in debt, which analysts say is high.

"That's the problem.  Qwest has a lot of debt on its books," said Doug Johnson, managing director at Catapult Growth Partners in Denver, a consulting firm.  "It's not out of the realm of possibility, but I don't think anybody in Denver could pull it off."

Carlyle Group, mentioned most often as a firm that could do a Qwest deal, possibly with other partners, did not return a call for comment Wednesday.  Carlyle has $35 billion invested worldwide.

Qwest, which has a market capitalization of $12 billion, declined to comment.

The telephone company's chief financial officer, Oren Shaffer, told investors at a conference this week that the company is well-positioned.

In recent days, analysts have also suggested Qwest could be snapped up by a bigger rival -- possibly Verizon or even AT&T.

Verizon has said it is focused first on buying the rest of its wireless business, currently owned by Vodafone.

Qwest is the last free-standing Baby Bell company.  It's a less desirable acquisition target, in part, analysts say, because it doesn't have a high-growth wireless operation, and because its land-line territory is spread over 14 mostly rural Midwestern and Western states.

In the past year, however, Qwest has increased free cash flow, reduced its debt and bumped its stock price.

"They've had an amazing recovery," said Jeff Kagan, an independent telecom analyst.

Qwest stock closed Wednesday at $6.44, up 6 cents.

Staff writer Beth Potter can be reached at 303-820-1503 or bpotter@denverpost.com.

Deep pockets

Private-equity firms are running the numbers on Qwest.  Below are some of the firms that could afford to buy the telecom, which has a $12 billion market capitalization and $15 billion in debt.

Firm name | Capital (billions)

Carlyle Group $34.9
Bain Capital Inc. $27
Blackstone Group $27*
Credit Suisse Private Equity $20
Kohlberg Kravis Roberts $17
GS Capital Partners $15
Apollo Advisors $14*
Welsh Carson Anderson & Stowe $14
Texas Pacific Group $13
Warburg Pincus LLC $12

All figures are amounts earmarked for U.S. investing only

*Estimated

Source: Private Equity Analyst

http://www.denverpost.com/business/ci_3582544