J Seymour is Carnac and tries to make sense of Qwst, Cobalt should check this out as well.
Carnac Rides Again: Answers to the Big Qwest Questions
By Jim Seymour
Special to TheStreet.com
6/14/99 3:21 PM ET
Too much, in both cases.
As a pre-emptive offer, to try to wrap this up before it gets any messier.
Frontier.
Global Crossing, Frontier and U S West, in that order.
No.
Because it can.
Remember the old Johnny Carson show shtick, in which Carson, wearing a ridiculous turban, parried with sidekick and straight man Ed McMahon in a sendup of psychics? Carson, as Carnac the Magnificent, answered questions before McMahon asked them.
Me, too -- make it Seymour the All Seeing. Because those are my answers to the six biggest questions about the offer by Qwest Communications (QWST:Nasdaq), which I am long, for U S West (USW:NYSE) and Frontier (FRO:NYSE):
What do you think about the high prices Qwest is offering to pay for both
U S West and Frontier?
Why would Qwest CEO Joe Nacchio overpay so badly -- about 25% in the case of U S West and 19% in the case of Frontier -- over the Global Crossing offer already on the table?
Since the Qwest offers are separate, if the company only gets one of these companies, which is the better deal for Qwest?
Whose shareholders are the real winners in this, in declining order?
Does this deal make strategic sense for Qwest holders?
Then why the heck would Qwest, with its smart management, come barging into this?
Readers already know I'm no fan of this potential deal. When I wrote about the pain of holding Qwest lately, I said I thought the company's talk about a U S West/Frontier play was a feint, and that the real threat came from the possibility of a friendly BellSouth (BLS:NYSE) acquisition of Qwest. I was wrong. In this latest round of this get-me-a-deal, gotta-have-a-deal saga -- is there a sleazoid cable TV game show lurking here? -- Nacchio has overreached not only his balance sheet, but also Qwest's highest-value mission.
The underlying reasons are pretty obvious, but all three are misconceptions. First, Qwest believes it needs to get bigger fast as the telecom world goes through something like the death stages of a great star, collapsing inward into an incredibly dense structure. Yes, there's a lot of consolidation going on. Yes, being big helps assure survival. No, Qwest didn't need to play the game this way.
Second, Qwest lusts after some real retail customers all its own. Building its superb and invaluable network of buried fiber to lease to communications carriers and major companies wasn't enough. Big margins there, but Nacchio wanted more. So he started buying into the long-distance business, mainly through alliances, now nixed by an appeals court in Washington, D.C., but also by buying-up long-distance companies. (Though long distance is a juicy business now, at retail prices typically just under a dime a minute, this value pricing won't last: As competition becomes more intense and costs are better understood, we're headed for sub-five-cents-a-minute long distance before long.)
Having conquered much of the available contract long-distance-provider wholesale market, Qwest -- now the fourth-largest long-distance company in the U.S. -- wanted to own some of those long-distance callers at retail. U S West and Frontier looked tasty. Yes, they do. No, this is the wrong end of the telescope for Qwest.
Third and finally, with Qwest's stock price up, Nacchio wanted to spend some of that cheap currency while he could. Qwest closed at 44 7/8 on Friday following days of rumors about a possible acquisition by BellSouth. The stock has been stuck in a mid-40s trading range for the last couple of months, but that price is triple, on a split-adjusted basis, last September's level. Buy while the buying's good, etc. Shareholder value? Heck, isn't shareholder value always enhanced by buying something? Yes, it's good to use a rich stock price to cut smart deals, but no, this wasn't the moment, and no, these aren't the companies, Joe.
There are so many rough edges here. Among them:
At the prices offered (without a collar, please note), Qwest will have to issue a billion-plus new shares and present Qwest holders will own less than half of QSWFrocacchio, or whatever the heck this dumb beast would be called. Can you say D-I-L-U-T-I-O-N?
Regulatory issues lie ahead, to put it mildly. The Telecom Act of 1996 says RBOCs can't sell long-distance service until they've fully opened their networks to local competitors. If this deal goes through, it is based in substantial part on what Nacchio this morning called the "operating synergies," which include selling Qwest long distance to U S West subscribers. How will QSWFrocacchio resolve that? If the combined companies have to wait until that dam breaks, the economics of this deal look even screwier.
What happens with the Qwest-BellSouth relationship? Remember, BellSouth owns 10% of Qwest and has been talking, in papers filed with the Securities and Exchange Commission, about perhaps buying the whole thing. Clearly, BellSouth isn't going to be interested in buying QSWFrocacchio. What happens to that 10% stake?
This is going to be an interesting couple of weeks as the U S West and Frontier boards consider the offer and Global Crossing (GBLX:Nasdaq) -- and perhaps BellSouth -- does, too. (As a Delaware corporation, U S West isn't required to consider the Qwest offer, but of course shareholders would lynch U S West management if it didn't.)
It's also going to be interesting -- and painful -- to watch Qwest share prices sink over this period. With Qwest down to about 35 at midafternoon -- already down almost 10 from Friday's close -- Qwest holders are swallowing hard. Very hard, Joe.
In all fairness, on the conference call this morning, Nacchio pointed out that when WorldCom went after MCI to form MCI WorldCom (WCOM:Nasdaq), which I am long, WorldCom shares took a similar beating in the short term. Obviously, Nacchio hopes Qwest enjoys the kind of subsequent soaring valuation WorldCom holders enjoyed.
Us, too, Joe. For now, your shareholders are hurtin'. Big
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