Qwest being seen as likely takeover target
By Andy Vuong
The mergers-and-acquisitions tailwind is not new, just stronger. A drumbeat of analyst upgrades over the past few weeks cites the potential for the Denver-based company to be swallowed.
"In recent years, we have seen numerous (rural phone company) mergers and acquisitions, and we expect further consolidation," Piper Jaffray analyst Chris Larsen wrote last week in upgrading Qwest shares.
UBS analyst John Hodulik was more direct, stating that he believes "the final leg to the (Qwest) story comes in the form of M&A."
Both UBS and Piper Jaffray seek investment-banking business from Qwest and buy and sell shares of the company.
Qwest's key assets are worth nearly $20 billion, according to an analysis by The Denver Post.
What company could, or would, cough up that kind of cash for a firm whose most valuable asset — phone landlines — is a dying business?
Smaller rural phone operators CenturyLink and Windstream have been mentioned as potential suitors. A leveraged buyout is not out of the question, as Qwest's cash reserves increased to $2 billion at the end of the third quarter, up from $590 million a year earlier, making it more attractive to private-equity firms.
Qwest spokeswoman Diane Reberger declined to comment.
With a massive debt load and varying assets, Qwest could be carved up for a sale, experts say.
The company has 10.5 million access lines in its 14-state local service territory — essentially the business Qwest bought from U S West in 2000 for $45 billion.
Last year, Frontier Communications purchased 4.8 million rural access lines from Verizon for $8.6 billion, paying roughly $1,800 per line.
Qwest's lines are worth less because they stretch across large swaths of isolated countryside — making them more expensive to serve — whereas Verizon's rural lines are more condensed. If Qwest can fetch $1,500 per line, the phone business, including broadband customers, could be sold for nearly $16 billion.
The company's 16 data centers could be worth about $1.5 billion, based on an average size of 50,000 square feet per location and construction costs of up to $2,000 per square foot.
Qwest's nationwide fiber-optic
communications network also could have a price tag of $1.5
billion, based on 22,000 route miles and industry construction
costs of about $70,000 per mile. The company tried
unsuccessfully to sell the network last year, reportedly seeking
$2 billion to $3 billion.
Finally, Qwest has fiber-optic
connections in more than 40
Rural phone operator CenturyTel merged with Embarq last year to form CenturyLink, a firm analysts say could have interest in Qwest. Monroe, La.-based CenturyLink operates 7.5 million access lines in 33 states.
"(CenturyTel's) model really has
been acquired growth as opposed to organic growth, and this has
been going on for at least 15 years," said Dave Novosel, an
analyst with Gimme Credit in
Novosel added that "right now, Qwest is probably too big of a chunk to bite off."
In December, Qwest chief financial officer Joe Euteneuer said industry consolidation would continue, but the company's low stock price prevents it from being the acquirer. Qwest shares have not been above $5 since 2008. The shares hovered around $4.30 last week, which fairly values the company at about $20 billion when factoring in debt and cash.
As of Sept. 30, Qwest had $13 billion in long-term debt and $2 billion in cash and equivalents.
"Management is talking a lot more
about it (consolidation)," said Donna Jaegers, an analyst with
D.A. Davidson & Co. in
Qwest may opt to continue doing
what it's done in recent years — cut costs to offset revenue
declines. That formula has helped the company, which employs
31,000, including 8,000 in
"It gets harder and harder to keep cutting costs," Jaegers said. "As (former WorldCom chief executive) Bernie Ebbers used to say, 'There's no more lemon juice left in that lemon.' "
Andy Vuong: 303-954-1209 or email@example.com