Report sees Qwest as a buyout lure
The once-troubled telecom has had five consecutive quarters of
profit but still sits on a mountain of debt.
By Andy Vuong, Staff Writer
Thursday, May 3, 2007
After years of reducing debt and growing cash flow, Qwest has
emerged as a possible candidate to be bought out by a
private-equity firm, according to a recent report by JP Morgan.
A deal to take one of Colorado's largest public companies
private could be worth $33.7 billion, the report estimates. It
assumes a transaction price of $10.26 a share, a 15 percent
premium over Qwest's close of $8.92 on April 16. The amount of
cash needed to close such a deal: $4.9 billion.
"Based purely on financial analysis, it's a very strong
candidate" to be acquired, JP Morgan telecom analyst Jonathan
Chaplin said Wednesday.
Other analysts, however, say a buyout is unlikely at this point
because Qwest, despite its improvements, is still highly
"The analyst that's promoting that idea seems to be ignoring the
fact that Qwest already has $14 billion of debt on their balance
sheet," said Janco Partners analyst Donna Jaegers.
Denver-based Qwest has $14.9 billion in debt, down from $26
billion in 2002, and $1.1 billion in cash and short-term
The company, which provides phone service in 14 states and
operates a fiber-optic communications network, reported
first-quarter earnings of $240 million Tuesday, its fifth
straight quarterly profit.
Qwest has forecast that it could generate as much as $1.8
billion in free cash flow this year, up from $1.4 billion in
Qwest chief executive Dick Notebaert declined comment about any
possible leveraged buyout.
"You know I'm not going to answer that," Notebaert said in an
interview Tuesday. "But it was a good question."
Notebaert stands to receive $63.5 million if Qwest is acquired
and he isn't retained, according to a regulatory filing.
In addition to its improved balance sheet, interest in Qwest
could hinge on the outcome of the "net neutrality" battle
between network operators and Internet content providers.
Internet companies want Congress to enact laws to prevent the
telecoms from having tiered pricing for access to their
networks. If they lose, online firms like Google and eBay might
look to acquire a network operator such as Qwest rather than
deal with escalating prices.
Winning the net neutrality battle "would raise the value of the
telecom providers in one of two ways," said Colby Synesael, a
telecom analyst with Merriman Curhan Ford & Co. "One, they're
simply going to be able to charge more money and therefore get
more margin and revenue from what's obviously a very fixed-cost
business. Or two, from a more strategic standpoint, some type
of (merger) or partnership of some sort could be formed."
Because Qwest is generating cash that could be used to pay down
the additional debt required for a leveraged buyout, a
private-equity firm could acquire the company, hold onto it for
a year or two and then cash out by selling to a deep-pocketed
JP Morgan's buyout model on Qwest is based on an 85 percent
debt-to-value ratio, with a private-equity firm raising $13.9
billion in debt on top of assuming Qwest's $14.9 billion in
That ratio is aggressive for leveraged buyouts, which typically
run around 70 to 75 percent, said Jerry Paul, a Denver hedge
fund manager who specializes in merger arbitrage.
"Maybe high-yield bank loan markets would accommodate that,"
Paul said. "It's not impossible, but it's a stretch in the debt
While the price tag could ultimately be higher than $33.7
billion because of the recent run-up on Qwest's stock price,
private-equity firms haven't shied away from deals of that
Kohlberg Kravis Roberts & Co. announced last month a $29 billion
leveraged buyout for Greenwood Village-based First Data Corp.
Qwest stock closed Wednesday at $9.39 a share, up 28 cents.
Staff writer Andy Vuong can be reached at 303-954-1209 or