refocuses effort on its land-line garden
Without wireless, firm has tough row to hoe, experts say
By Jeff Smith
Rocky Mountain News
Saturday, March 11, 2006
Qwest Communications is sticking to its game plan after
failing in its bid last year to buy MCI Inc. Improve
revenue. Reduce costs. Cut debt. And hunt for a deal to
boost its size and value.
But questions about the Denver telco's future viability are
being asked again in the wake of AT&T's grab of
Atlanta-based BellSouth. Reflecting renewed takeover
speculation, Qwest's stock was wobbly this week, rising
suddenly from $6.59 to $7.02, dropping to $6.38, and
settling at $6.48 on Friday.
"Qwest without a wireless network is a little bit like the
kid who never gets picked for a team in high school," said
Bruce Allen, owner of Bruce G. Allen Investments in Denver.
"I'm not sure what the attraction is at this point."
Citigroup's Michael Rollins downgraded Qwest's stock to a
"sell" this week, saying Qwest was unlikely to be bought by
a larger telecom company and would struggle in its efforts
to grow revenue on its own.
The telecommunications analyst also estimated Qwest, which
is carrying some BellSouth communications traffic, stands to
lose about $200 million to $300 million in revenue in 2007
when that traffic is transferred to the AT&T network.
That works out to 1.5 percent to 2.2 percent of Qwest's $14
billion of annual revenue.
There's no sign of panic at Qwest, at least outwardly, that
it might be left a Bell orphan. In fact, Chief Financial
Officer Oren Shaffer indicated this week the telco relishes
the fact that main competitors such as Verizon and AT&T are
preoccupied with absorbing large mergers.
"It's good for us," he said at an analyst conference in
Shaffer said the 40,000-employee company is trying to adopt
the best strategy for its shareholders: be "very
protective" of its 14-state Western local phone region and
invest in new products and services.
"I think if one were trying to position themselves to make
sure they were still in the game, if you will, as the
industry consolidates," Shaffer said, "you would do just
that, you would try and make yourself as valuable as you can
and . . . I think we have done that."
Jerry Paul, chief executive officer of Quixote Capital
Management in Greenwood Village, which focuses in part on
merger arbitrage, said he likes what Qwest has done.
"Debt load remains an obstacle, although I love their
(financial) restructuring. It's been good for the stock."
Qwest stock was trading below $4 as recently as last fall.
But continued improvement will be difficult, according to
Rollins and others.
Qwest has no wireless operation; it resells Sprint/Nextel
service. It has a shrinking local-phone business, and its
dominant markets -- Denver, Portland, Ore., Seattle, Salt
Lake City and Minneapolis -- are under increasing attack by
cable companies. In some cases, municipalities themselves
are thinking about going into the broadband business.
"They have to be willing to prepare for life alone," said
Ray Gifford, former chairman of the Colorado Public
Utilities Commission and president of the Progress & Freedom
Foundation, a Washington think tank.
"That means figuring out a way to balance (cost and debt
reduction) with having capital budgets significant enough to
meet the competitive onslaught from cable. . . . They really
do need to have the capital to invest or they'll die a slow
One can never say never, but an acquisition of Qwest appears
unlikely, at least in the short term.
Verizon is capable of buying Qwest if it thinks AT&T would
make a run at the company. But Verizon has been clear that
it has a higher priority: trying to buy out Vodaphone's 45
percent stake in Verizon Wireless.
And AT&T, which would benefit from creating a coast-to-coast
network by buying Qwest, would seem to have enough on its
plate, with the recent merger of SBC and AT&T and now the
acquisition of BellSouth.
Sprint, which used to be mentioned as a merger partner, has
been focusing on the high-growth wireless business, recently
Private equity firms also have been mentioned as takeover
possibilities. Many have the resources, but, analysts ask,
do any want the hassle of running a complicated, regulated
business that has high overhead expenses?
The most compelling reason companies are making
acquisitions, Allen noted, is to expand their wireless
operations, as in Sprint, as in AT&T buying BellSouth for
its 50 percent stake in Cingular Wireless.
"That's the golden goose, or at least it's considered the
golden goose at this juncture," Allen said. His firm has
holdings in most of the large telecommunications companies
and a small position in Qwest.
Another hurdle is that many, including Citigroup's Rollins,
view Qwest as overpriced. Its current market value is more
than $12 billion. A buyer presumably would have to pay a
premium and be willing to take on $15 billion in debt.
A couple of possible deals in the next six months or so
might change the telecommunications landscape, Allen
Both Alltel and Sprint/Nextel will possibly separate their
wireless and land-line phone businesses.
"At that point, it may be interesting to see who is
interested in acquiring their wireless businesses," Allen
Or land-line businesses, for that matter.
Qwest proved it could surprise when it was competitive in
the bidding for MCI.
But Donna Jaegers, a telecommunications analyst at Janco
Partners in Greenwood Village, believes Alltel's wireless
assets, for example, would be out of Qwest's reach.
Alltel's market value is $25 billion, pre-spin-off.
And she doesn't buy speculation Qwest could do a deal with a
satellite-TV provider. Qwest already offers video services
through DirecTV as part of a communications package.
"I don't see DirecTV, which also has alliances with Verizon
and BellSouth, as wanting to be exclusive with Qwest, and I
don't think Qwest could pony up the money to buy DirecTV or
Dish (Colorado-based EchoStar). . . . I don't sense anything
big is going on."
Instead, Jaegers believes Qwest's best options are to
continue hunting for smaller acquisitions that can gradually
build its business.
One area that could really help Qwest's finances, she said,
is buying a company that would put more traffic on the
company's long-distance fiber-optic network.
In the past, Jaegers has said she believes Douglas
County-based Time Warner Telecom could fit the bill.
But Time Warner Telecom, which provides high-speed services
to businesses, has posted double-digit revenue growth its
past two quarters, and its stock has doubled since last fall
to nearly $15 a share. That's put the company's market
value at $1.7 billion.
"I think they've run past Qwest's budget now," Jaegers said,
adding Time Warner Telecom possibly is looking for an
acquisition of its own.
Jaegers does think there's a possibility of an acquisition
outside the traditional telecom space, something Qwest Chief
Executive Dick Notebaert said recently the company would
"Maybe they'll buy somebody like a Savvis," said Jaegers,
referring to the St. Louis-based information technology
services firm that has Internet-hosting centers and 5,000
business customers. "That kind of operation makes sense --
they have enterprise customers that (Qwest) could put on its
own network and improve its scale."
Savvis has been losing money and was rocked by controversy
after its former chief executive allegedly spent $241,000 at
a New York strip club. But the dispute over the bill has
been settled, and Savvis has stemmed its losses. But
because its stock has been hammered, its market value is
less than $200 million.
Jaegers noted the company's largest shareholder is Welsh
Carson Anderson Stowe, the same leveraged buyout firm that
bought the Dex telephone directory business from Qwest in
2002 and 2003.
Gifford of the Progress & Freedom Foundation said this week
he thinks the next big wave of consolidation will involve
communications carriers and content or application
providers. That's because, he said, communications
transport essentially has become a commodity, while the
profit is in the content.
That also brings up intriguing possibilities for Qwest,
which already has a partnership with Microsoft's MSN in
providing high-speed Internet services.
But it's unclear which small, medium or large content
provider would be a merger or partnership prospect. Google,
which wants to surpass Microsoft as a technology giant, has
been the most tantalizing name to come up in parlor-room
"It might be interested in buying Qwest's network," Jaegers
said, "but I don't think they would be interested in the
rest of Qwest. It's just too regulated."
But as Qwest's run for MCI proved, what happens next and
when might be something few expected.
"In the near term, it's not clear to me that they've got to
be bought by anyone," Paul of Quixote Capital Management,
said of Qwest. "But longer term, I believe that's got to
happen if they don't get scaled up."