Again Put in a Funk Amid Deal Talk
By Shawn Young and Sara Silver
The Wall Street Journal
Wednesday, March 8, 2006
AT&T Inc.'s proposed acquisition of
BellSouth Corp. sent shares of
Qwest Communications International Inc. on a roller
Following Sunday's announcement of the planned $67 billion
deal, Qwest's shares were up 3.7% amid speculation that the
telephone company -- with a market value of only $12 billion
-- might become the next target in an industry that is
consolidating faster than expected. But the excitement
fizzled fast as two analysts slapped "sell" ratings on the
stock yesterday. The stock was down 46 cents, or 6.7%, to
$6.38 in 4 p.m. trading on the New York Stock Exchange.
This isn't Qwest's first bout of Wall Street whiplash.
Qwest's stock, which was a Wall Street darling during the
telecom and Internet craze of the late 1990s, plunged into
the low single digits a few years later as an industry
meltdown, an accounting scandal and a huge debt load raised
the specter of a bankruptcy-court filing. The stock rallied
more than 60% in the past 12 months as the company reduced
and refinanced debt, paid settlements in shareholder
lawsuits and promised a return to profits this year. At
less than $7 a share, it is hard for some investors not to
think of it as cheap.
AT&T's plan to buy BellSouth highlighted a relative lack
of strategic or deal-making options for Qwest, which looks
weak compared with its peers, some say.
"They're in kind of a hazy situation," says Steve Paspal, a
senior analyst at Sovereign Asset Management. "They were a
lot worse off financially a couple of years ago and they've
improved a lot, but that doesn't mean the future is really
In reports downgrading the shares, Michael Rollins of
Citigroup and Christopher King of Stifel Nicolaus, a
brokerage and investment-banking firm, both said a merger is
unlikely and noted that Qwest shares are significantly more
expensive than those of its stronger siblings when prices
are contrasted with expected earnings before interest,
taxes, depreciation and amortization. Mr. Rollins said
Qwest trades at 6.1 times his Ebitda estimate for this year,
compared with a multiple of 5.4 for
Verizon Communications Inc. and AT&T, which are larger,
have smaller debt burdens and are better positioned for
Citigroup Global Markets and its affiliates own Qwest
securities and have provided investment-banking and other
services to Qwest. Stifel Nicolaus doesn't have a position
in Qwest stock and doesn't do investment-banking work for
In addition, Mr. Rollins said, Qwest could lose more than
$200 million in revenue in 2007 as BellSouth moves its
long-distance traffic from Qwest's network to AT&T's. Qwest
declined to discuss specific customers.
In 2005, Qwest posted a loss of $779 million on revenue of
$13.9 billion. After the close of the BellSouth
acquisition, AT&T is expected to have roughly $120 billion
in annual revenue.
Any potential buyer for Qwest would be confronted with a
company that still has $15.5 billion in debt, owns no
wireless assets and serves a heavily rural territory in 14
Western and mountain states.
Verizon, which may feel pressured to match AT&T's move,
isn't likely to be a buyer because it has been selling rural
phone lines like Qwest's by the millions. Verizon picked up
long-distance assets with its acquisition of the former MCI
Inc. AT&T eventually may focus its acquisition machine on
Qwest, but it isn't likely to be a priority after the
rapid-fire series of gigantic takeovers that culminated in
the BellSouth deal.
Qwest Chief Executive Richard Notebaert has suggested that
Qwest might be a buyer of smaller companies, possibly
outside telecom, but the company declined to elaborate
yesterday. A partnership or deal with a satellite company
would make sense, says Maribel Lopez, an analyst at
Forrester Research. But analysts say it is unlikely that
any acquisition small enough to be affordable for Qwest
would be significant enough to really change its outlook.
Still, after years of losses, the company expects to become
profitable again this year. Revenue has edged up for the
past three quarters, high-speed Internet sales are growing
and the company is having some success in selling
Sprint Nextel Corp.'s wireless service under the Qwest
name. Qwest retired $3 billion in high-cost debt in the
fourth quarter and expects a $300 million reduction in
interest expenses this year.
All that might pique the interest of private-equity
investors attracted by Qwest's sluggish but cash-rich
local-phone operation. So far, though, there is little to
suggest that a deal is in the works.
Qwest's chief financial officer, Oren Schaeffer, said the
company's priority is to return value to shareholders out of
its cash flow, but he didn't rule out a sale.
"What we've tried to do is probably the best strategy for
our shareholders, which is to create in Qwest the most
valuable set of assets that we can," he said Monday at a
Raymond James Financial Inc. investor conference in Orlando,
Fla. "And I think if one were trying to position themselves
to make sure they were still in the game ... you would try
to make yourself as valuable as you can and keep your
territory and your franchises as valuable as you could."
Shawn Young at
email@example.com and Sara Silver at