Qwest to Buy LCI for $4.43 Billion; Will Create Long-Distance Giant
By STEPHANIE N. MEHTA
Staff Reporter of THE WALL STREET JOURNAL
Qwest Communications International Inc., a start-up telecommunications carrier, agreed to acquire larger rival LCI International Inc. for $4.43 billion in stock, creating the nation's fourth-largest long-distance company.
The pact comes at a critical juncture for both companies, which are small players in the rapidly consolidating phone industry. Denver-based Qwest is building an expensive fiber-optic network that it is eager to fill with long-distance telecommunications traffic; LCI, based in McLean, Va., lacks international and local facilities, and needed to combine or face the threat of being steamrolled by larger carriers such as MCI-WorldCom, analysts said.
The leaders of both companies heralded the deal as a "hand-in-glove" combination that gives Qwest access to LCI's base of residential and small-business customers, and its sophisticated software and consumer billing systems. LCI has been a trailblazer in consumer marketing, too, introducing flat-rate pricing and billing in single-second increments as opposed to in full minutes.
LCI Shares Jump 9.6%
Qwest's $42-a-share offer -- a 22% premium over LCI's closing share price on Friday -- pushed LCI shares up $3.3125, or 9.6%, to $37.6875 in New York Stock Exchange composite trading Monday. Qwest shares fell 50 cents, or 6.7%, to $36 in Nasdaq Stock Market trading.
"Two interesting, well-run companies will become one very powerful company by putting their complementary capabilities together," said Joseph P. Nacchio, president and chief executive officer of Qwest, in an interview.
But LCI Chairman H. Brian Thompson was reluctant to sell to the smaller company. LCI's board advocated the marriage, convinced that the second-tier carrier needed to participate in the wave of mergers sweeping the industry.
"I'm like anybody who has built an enterprise like this," Mr. Thompson said in an interview. "I take a lot of pride in the way people [at LCI] are free to do things ... so perhaps I was a reluctant seller."
Indeed, Mr. Thompson engineered LCI's turnaround, taking a struggling company, then known as LiTel Telecommunications, and shaping it into one of the fastest-growing long-distance companies. For last year, it reported revenue of $1.64 billion, up from $220 million in 1991, when Mr. Thompson came aboard.
Mr. Thompson cut his marketing teeth at MCI Communications Corp., where he competed against Mr. Nacchio, who then ran AT&T Corp.'s consumer and business service units. Mr. Thompson is set to become Qwest's vice chairman and a director. LCI will also receive a second seat on the Qwest board, bringing total board membership to 12.
LCI Board's Role in Deal
One of the early investors in LCI, E.M. Warburg Pincus & Co., apparently played an instrumental role in putting together the Qwest transaction, according to people close to the deal. Douglas Karp, a Warburg partner, sits on the LCI board. Warburg's original $60 million investment made in the early 1990s is currently valued at $1.26 billion to its investors who now hold the shares.
Mr. Thompson acknowledged his board's role in the transaction, but denied that he was in any way directed to negotiate with Qwest. He said he and Mr. Nacchio first spoke of a possible merger at an industry convention last fall. "We went through several fits and starts," Mr. Thompson recalled, noting that talks began in earnest less than two weeks ago. He said he had no qualms about selling his company to a rival half LCI's size.
Qwest has been one of the hottest companies on Wall Street, grabbing headlines with its bold strategy of building robust fiber-optic pipelines. Founded by railroad baron Philip F. Anschutz, the company started out as a "carrier's carrier," selling capacity to phone companies such as Frontier Corp. and GTE Corp.
Last year, Qwest hired Mr. Nacchio, who began the company's push into the retail business in earnest with a splashy, 7.5 cents-a-minute, long-distance offering that sends voice calls using Internet technology. The question now is whether Qwest-LCI can develop new applications and products to fill up the carrier's vast pipes. The combined companies, with their 2.3 million customers and $2.3 billion in combined 1997 revenue, control only a small fraction of the $90 billion-a-year long-distance market. The top three long-distance companies are AT&T, the combined MCI-WorldCom Inc. and Sprint Corp.
Executives of the companies insisted that the deal catapults Qwest into the big leagues, perhaps setting up a good fight between Mr. Nacchio and his former colleagues at AT&T. "This new company is a threat to the big guys already, reflected in our influence and our ability to innovate and change the rules of the game," Mr. Nacchio said.
While Qwest lacks big revenues and earnings, it has a staggering market capitalization of more than $7 billion. Like WorldCom, which agreed to swallow bigger carrier MCI for $37 billion, Qwest is able to use its high-flying stock as currency to acquire the bigger carrier.
The companies said they expect the merger to result in cost savings of about $300 million in the first full year after the combination. The companies also said they expect to avoid duplicate capital expenditures. LCI, for example, already operates branch offices in cities that Qwest had been targeting. And Qwest is building an advanced data network, something LCI said it had planned to construct. Qwest, with its plan to extend a fiber-optic network into Mexico, also brings international facilities to the table.
LCI was advised by the Lehman Brothers Inc. unit of Lehman Brothers Holdings Inc. and the law firms Kramer, Levin, Naftalis & Frankel, and Simpson, Thacher & Bartlett. Qwest was advised by the Salomon Smith Barney unit of Travelers Group and law firm O'Melveny & Myers.
Telecom Merger Frenzy
The proposed Qwest-LCI transaction is the fourth big telecom marriage announced this year. So far, SBC Communications Inc., AT&T and AirTouch Communications Inc. have agreed to buy other carriers. Telecom analysts predicted Monday that the merger frenzy will continue in the industry.
Daniel P. Reingold of Merrill Lynch & Co., said Frontier, the Rochester, N.Y., carrier, remains an attractive target for a long-distance company or a Baby Bell. A Frontier spokesman declined to comment on such speculation.
Meanwhile, Qwest itself may pursue a competitive local carrier, such as Intermedia Communications Inc. or ICG Communications Inc., as a way to deliver high-speed, high-bandwidth services to the "last mile" of phone line that leads to offices and homes, Mr. Reingold noted.
Conversely, Qwest-LCI could ultimately be bought by a Bell company to energize its own long-distance business. Many analysts and telecommunications executives believe that the industry will come to be dominated by four or five global players, and that smaller companies will either have to be a part of these bigger entities or be crushed.
Under the terms of the deal, LCI's shareholders will receive $42 a share in Qwest stock as long as the stock doesn't fall by 25%, or doesn't rise by 10%. If it falls 25% or more, shareholders won't receive more than a predetermined number of Qwest shares, though LCI could choose not to proceed with the merger. If Qwest's stock rises by more than 10%, LCI shareholders will benefit by receiving stock valued at more than $42 a share. Breakup fees are about 3% of the deal's size, and LCI can talk to third parties if it receives a superior proposal. |
