Thread: FYI from IIOnline - Qwest: Hunting Smaller Game, It Could Be a Target
iionline.com
Len Hollie (8/2/99)
Qwest Communications' (NASDAQ: QWST - Quotes, News, Boards) goal is to become a 21st Century telecom heavyweight.
To that end, on July 19th, Qwest agreed to a $45 billion strategic merger with US West (NYSE: USW - Quotes, News, Boards), betting that millions of new local customers will pour in billions of revenue to help the company battle the likes of AT&T (NYSE: T - Quotes, News, Boards), MCI WorldCom (NASDAQ: WCOM - Quotes, News, Boards) and Sprint (NYSE: FON - Quotes, News, Boards).
While Qwest will likely spend the near term working out its US West merger, analysts say there are still a few pieces that the company needs to add to its local puzzle. In addition, Qwest may find itself the target of an even larger suitor at some point in the new millennium.
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"For the immediate future, what Qwest will likely be doing is executing a plan to get the benefits out of their US West acquisition," says Hank Riehl, analyst at Denver-based American Fronteer who rates the stock a strong buy.
"They have to demonstrate to investors and to Wall Street that they have a plan to make this merger work. So they likely won't be making any major acquisitions for at least another 12 to 24 months that would dilute their stock," Riehl says.
However, Reihl didn't rule out the possibility of Qwest making small, strategic acquisitions of CLECs (Competitive Local Exchange Carriers) in the near future. "But those are only the acquisitions that Qwest would make," Riehl says. Analysts note that CLECs target the small-to-medium business and consumer markets with a wireless broadband technology that offers cheaper telephone service and speedier Internet connections.
Other analysts agree with Riehl. "I do believe that Qwest would look at the CLECs to get greater access to the local telephone markets, but they are going to keep things small and simple," says Jim Linnehan, analyst at Thomas Weisel Partners, who also rates the stock a strong buy. "There will be a roll-up in the CLEC industry in which companies will be merging and consolidating, and Qwest will be a part of that," Linnehan says.
Linnehan said Qwest would likely look at CLECs that are outside the US West region - a mostly western and southwestern 14-state territory that includes Colorado, Minnesota, Washington State, Wyoming, Arizona, Idaho, the Dakotas, and others -- because US West already brings them local customers. Some candidates could include WinStar (NASDAQ: WCII - Quotes, News, Boards), Nextlink (NASDAQ: NXLK - Quotes, News, Boards) and RCN Corp. (NASDAQ: RCNC - Quotes, News, Boards).
Linnehan notes that Qwest may also be looking to build an Internet web hosting capability, in which the company would design and maintain web pages, including providing interactive tools, e-mail and e-commerce capability. "That is one thing they didn't get when Frontier went to Global Crossing," he says.
Like the other major telecoms, Qwest has benefited from surging demand for data and Internet services. On Tuesday, July 27th, the company reported second-quarter profits of $18.5 million, or 2 cents per share, beating the 1-cent per share estimate. Qwest more than doubled revenue to $873.7 million from $393.7 million a year earlier, with core communications services accounting for $790.4 million of second quarter revenue, a 46% jump over the previous year.
Qwest was updated to buy from accumulate by A.G. Edwards last week. Qwest also recently completed building an 18,500-mile network of fiber-optic cables.
Qwest's stock price climbed to the low 30s on Tuesday after the earnings were released, up from Monday's close of $28.56. That level is important because Qwest's deal with US West provided a collar to protect U S West shareholders. Qwest agreed to pay $69 for each U S West share as long as its stock trades between $28.26 and $39.90. Below $28.26, U S West shareholders get less, and above $39.90 they get more. In addition, if Qwest's stock trades below $22.00 per share for a specified period, U S West can void the deal
"Qwest's stock price is up because of more than the numbers, even though Qwest has beaten analysts' estimates for 9 straight quarters," says Fronteer's Riehl. "What's happening now is the globalization of this company. It's getting prepared for the next 20 years of growth," he says.
BellSouth Buyout?
Riehl believes that although Qwest will only make modest acquisitions in the near term, the company could become a takeover target by BellSouth Corp. (NYSE: BLS - Quotes, News, Boards).
"BellSouth earlier took a 10% stake in Qwest, and since the U S West deal that stake has been diluted to 4%," says Riehl. "BellSouth is stronger and has more depth than the Qwest-US West combination. And, it is the one remaining RBOC (Regional Bell Operating Company) that is unmarried and unengaged to a high tech partner. For that reason, at some point we may see a Bell South play for the Qwest-US West combination," he surmises.
Linnehan of Thomas Weisel Partners is not as certain of a BellSouth takeover of Qwest, but he notes that the company has said it would like to restore its 10% stake. "I don't think the FCC would look favorably on BellSouth taking over Qwest-US West. There may be some anti-trust issues," says Linnehan. He adds: "It's not conceivable that such a takeover would occur in the next two years."
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