DCR Comments on BellSouth's Strategic Relationship with Qwest Communications International
CHICAGO, April 22 /PRNewswire/ -- BellSouth Corporation (BLS) (NYSE: BLS - news) and Qwest Communications International Inc. (Nasdaq: QWST - news) recently announced a strategic relationship to deliver a full set of data, image and voice services to their customers. In addition, BLS will invest approximately $3.5 billion for a 10 percent equity stake in Qwest. Duff & Phelps Credit Rating Co. (DCR) currently rates the senior unsecured debt of BellSouth Capital Funding (BLS-CF) 'AA+' (Double-A-Plus). BLS-CF is a subsidiary of BellSouth Corporation (BLS), and funds the businesses of BellSouth Enterprises (BSE) and the unregulated subsidiaries of BellSouth Telecommunications (BST). BLS has agreed to ensure the timely payment of principal, premium and interest on the debt securities of BLS-CF. DCR also rates the senior unsecured debt of BST 'AAA' (Triple-A).
DCR recognizes the near- and long-term benefits BLS will be able to derive from the strategic relationship with Qwest. In the near-term, the relationship will enable BLS to retain large business customers, as the two companies will immediately begin the coordinated marketing of BLS' and Qwest's services. The relationship also presents to these customers a clear long-term path for BLS' provision of data and voice services after interLATA relief is obtained. Moreover, there will be cost savings and revenue synergies as BLS transitions its long distance traffic, such as wireless, to the Qwest network and as Qwest uses the BLS network to terminate traffic for its customers. Following interLATA relief, the companies will be able to jointly develop and market a full set of high-speed data, image and voice communications services to business customers. In this mode, BLS will be the retailer of the two companies' products and services in the South, with Qwest assuming the role in the remainder of the country.
BLS expects to fund its investment in Qwest primarily with debt. In 1999 and 2000, savings arising from the relationship with Qwest are expected to roughly offset the carrying cost of BLS' 10 percent stake in Qwest. In addition, BLS is expected to generate strong growth in EBITDA in 1999 and 2000. Overall, EBITDA interest coverage over the next two years is expected to be consistent with the 11.7-12.0 times range recorded in the 1996-98 period. BLS' financial profile is strong with expected free cash flows over the next two years to contribute to the company's financial flexibility. As part of the agreement, following interLATA relief, BLS will have the right to increase its stake in Qwest to 20 percent and will gain a seat on Qwest's board of directors. Depending on the timing of such an event and BLS' financial profile at that time, BLS' credit profile could be negatively impacted.
BellSouth Corporation provides service to 24.4 million access lines in nine Southeastern states. On a proportionate basis, the domestic wireless operations of BLS provide service to 5.0 million customers. The company also has investments in telecommunications and wireless networks in Latin America, Germany and several other countries.
Duff & Phelps Credit Rating Co. (DCR) is a leading global rating agency with 32 local market offices providing ratings and research on debt issues and insurance claims paying ability in more than 50 countries. For additional research on BLS, visit DCR's web site at dcrco.com (Quick Search: BellSouth). DCR's research is also available on Bloomberg at DCR<GO> and First Call's BondCall Direct/Research Direct at firstcall.com, as well as through other third-party providers. |
