CEO pressured to buy assets
Telecom analysts recommend aggressive acquisition strategy
By Jeff Smith
Rocky Mountain News
Wednesday, August 22, 2007
New Qwest CEO Ed Mueller's honeymoon promises to be a short one
as pressure mounts to be more aggressive on the merger and
acquisition front. It's not his only challenge, by any means.
But questions are growing more insistent about how successful
Qwest can be as a stand-alone telecommunications company if it
doesn't move to increase revenues through acquisitions as well
as from internal operations.
"I think they need to be (more aggressive)," said Donna Jaegers,
a telecommunications analyst with Janco Partners in Greenwood
Mueller, 60, a telecom veteran who most recently served as chief
executive officer of specialty retailer Williams-Sonoma, said
last week that Qwest needs to build revenues, which have been
flat at about $14 billion a year.
Boosting revenues from within could be tricky because of the
competitive challenges facing Qwest from cable-TV and wireless
companies, the losses in its traditional landline business and
economic uncertainty. There already is evidence that problems
in the housing market are exacerbating line losses.
Mueller isn't expected to develop a full strategy for several
But in interviews last week, he said he is here to run a
company, not groom Qwest for a sale.
He mostly reiterated predecessor Dick Notebaert's views on
Mueller indicated he's happy with the DirecTV alliance and
doesn't plan to invest heavily in a fiber buildout to offer
He said he wants to continue to reward the company's
shareholders, which could mean another stock buyback and/or the
first dividend since 2002.
And he said he would seek to be "opportunistic" when it comes to
mergers and acquisitions.
Qwest could get a much-needed revenue boost from being awarded a
piece of the government's multibillion-dollar Networx
telecommunications program. But the telco still must bid for
contracts with individual government agencies.
More assets could help
At some point Qwest -- or pieces of the company, such as its
fiber-optic network -- might interest AT&T or Verizon. But most
analysts believe it's more likely that Qwest will have to go out
and do its own deals to improve its competitive position.
"There's no headline-grabbing deal, but there are some small
assets out there that could reduce their costs," Chris Larsen, a
telecommunications analyst for Credit Suisse, said in an
interview a few days before Mueller was named.
The most logical next step for Qwest is to buy assets, agreed
Ray Gifford, former Colorado Public Utilities Commission
chairman and head of the law firm Kamlet Shepherd & Reichert in
A sale to a private-equity firm seems nearly impossible in
Gifford's view because he thinks state regulators would block
it, fearing the buyer would just hike debt and crimp capital
Mueller has a lot of experience integrating operations, such as
Pacific Bell with SBC Communications. He also is a director of
a newly organized acquisition company. But it remains to be
seen how good he'll be in identifying and evaluating possible
acquisition targets. He could bring in someone to do that for
Jaegers has long been of the view that Qwest needs to acquire
assets that will boost traffic on its nationwide fiber-optic
Possibilities include Virginia-based XO Communications and
Douglas County-based Time Warner Telecom, both of which provide
communications services to businesses. But Time Warner
Telecom's stock has enjoyed a strong run, and the company may be
Embarq, a Sprint spinoff that is the local phone provider in Las
Vegas and in parts of the Southeast and Midwest, also has often
been listed as a possible merger partner. There was speculation
that its CEO, Dan Hesse, was a possible candidate to succeed
But Embarq is similar to Qwest in terms of vulnerable local
landline assets, "although girth sometimes helps when you're
slowly starving," Jaegers said.
Or Qwest might contemplate acquiring or merging with a
long-distance fiber-optic rival, such as Global Crossing or even
Broomfield-based Level 3 Communications. But Level 3 CEO James
Crowe seems determined to remain independent, and Jaegers said
she doesn't think Qwest would want to take on Level 3's nearly
$7 billion in debt.
Qwest tried to buy MCI
Under Notebaert, Qwest made a run at MCI that some think was
more a public relations effort to put Qwest back on the map.
Qwest also bought a small fiber-optic company called OnFiber for
But it was Level 3 and Time Warner Telecom that did the big
deals. Level 3 snatched up a half-dozen local, regional and
national communications networks.
While critics said Level 3 overspent for some of those assets,
others say Qwest missed out on opportunities. One big problem,
analysts say, is that Qwest doesn't have the stockholders
willing to take on as much risk or dilution of their shares.
The more conservative view has been reflected in recent analyst
notes about Mueller.
For example, Kevin Coyne, a bond analyst at Goldman Sachs, liked
that Mueller reiterated many of Notebaert's sentiments about
Coyne wrote that the key risks would be pursuing a fiber
buildout of its network, introducing a large annual dividend or
making an acquisition financed primarily by debt.
But if Mueller can't increase revenues internally, he might have
no choice but to get more aggressive.
Phil Weiser, professor of telecommunications law at the
University of Colorado, said Qwest's recent $2 billion buyback
could have been used for strategic investments instead. And he
hopes that Mueller, with his background in retail, has a broader
If Qwest were just a seller to AT&T or Verizon, "in a sense it
would be more of the same," Weiser said. "In my viewpoint,
society would be better served by some experimentation. Qwest
is in the position to try things out, take some risks. But
first there needs to be a strategic vision of what (kind of)
acquisition can get you there. Certainly they have some
constraints, but they also have the opportunity to think
Here are some bigger companies that could be Qwest merger
Embarq - Kansas-based Embarq, a Sprint spinoff, is a
communications provider in Las Vegas, the Southeast and central
• 2006 revenue: $6.4 billion
• Market cap: $9.1 billion
Global Crossing - Bermuda-based fiber-optic network
• 2006 revenue: $1.8 billion
• Market cap: $654 million
Level 3 Communications - Broomfield-based Level 3 is a
fiber-optic network operator.
• 2006 revenue: $3.4 billion
• Market cap: $7.3 billion
Time Warner Telecom - Douglas County-based business
• 2006 revenue: $812.3 million
• Market cap: $2.8 billion. Revenue will top $1
billion this year, after acquisition of Missouri-based Xspedius.
XO Communications - Virginia-based XO Communications is
a business communications provider, with broadband wireless
• 2006 revenue: $1.4 billion
• Market cap: $620 million
Windstream Communications - Arkansas-based provider of
residential and business telecommunications services to mostly
rural areas in 16 states.
• 2006 revenue: $3 billion
• Market cap: $6.4 billion
smithje@RockyMountainNews.com or 303-954-5155