Merrill (Reingold) on QWST's recent forays:
Investment Highlights:
· Attempting to break up Global Crossing's (GBLX, 6-6, $50 3/8) and U.S.
West's merger of equals, Qwest (QWST, 6-6, $34 1/8) has entered counter
bids for US WEST (USW, 6-6, $58) at $80 in stock and for Frontier (FRO,
6-6, $57 3/8) at $75 (the latter $75 comprised of $20 in cash and $55 in
stock). Both offers would be reduced by $2.00 per share if either Frontier
or USW does not accept the offer. We are going to a 6-6 (no opinion) on
U.S. West and Qwest because they are no longer trading on fundamentals.
1) We are restricted from comment on USW, GBLX, QWST and FRO.
However, we are not restricted from comment on implications for other
stocks. We also highlight our May 25 report entitled The Telecom Dating
Game, which highlights several smaller stocks.
2) Regardless of who wins here, (Qwest or GBLX) the loser will need local
connectivity and will likely go on a buying binge of CLEC's. We highlight
Nextlink, $140 price objective (NXLK, D-1-1-9, $71), Teligent, $66 12-18
month price objective (TGNT, D-2-1-9, $51 1/8), Intermedia, $36 12-18
month price objective (ICIX, D-2-1-9, $21 3/16) and ICG, $31 12-18 month
price objective (ICGX, D-2-1-9, $18).
3) If GBLX does not win Frontier and Frontier's 24 strand, 17,600 mile fiber
nationwide US network, it will likely seek another US long haul fiber
capacity system. We highlight IXC, ITC^DeltaCom (ITCD, D-2-1-9, $24
15/16) and CapRock (CPRK, D-2-1-9, $25 3/8). We also continue to believe
RSL (RSLC, D-1-1-9, $25 7/8) is a prime take-out target, particularly for its
European retail operations that could be attractive to QWST, GBLX, GTS
(GTSG, D-1-1-9, $74 3/4) and others.
4) Very importantly, Qwest and GBLX are actively seeking incumbent local
telephone properties (i.e., RBOCs). This highlights a view that we have
held for a long time – namely, that RBOCs and incumbent local phone
companies have significantly undervalued stocks. We highlight two key
RBOC value drivers: 1) they have ubiquitous first and last mile
connectivity; 2) they have very significant upsides in LD in the future and
also high speed DSL access. Both of these aspects are undervalued in the
public markets in our view and a transaction with USW highlights this.
5) In this context we also highlight GTE, price
objective $100 (GTE, B-1-1-7, $69 13/16), Bell
Atlantic, 12-18 month price objective $85
(BEL, B-2-1-7, $60 7/8), Alltel (AT, C-2-1-7,
$72 3/8), Cincinnati Bell (CSN, B-2-1-7, $24
7/8). GTE and Bell Atlantic once merged,
which we expect in 1Q00, will have most of
what Qwest and GBLX are trying to create 1)
nationwide fiber which GTE brings; 2)
ubiquitous last mike connectivity; 3) large
customer base and scale economies; 4) long
distance and DSL upsides; 5) web hosting
capability and internet service provider(which
GTE brings); 6) Trans-Atlantic undersea
cable (which Bell Atlantic brings), and 7) the
ability to trade its large volumes and US
capacity for European or Asian or undersea
connectivity. We highlight GTE and Bell
Atlantic as companies that Qwest and Global
Crossing are trying to emulate by offering for
USW and Frontier. We also highlight Alltel
and Cincinnati Bell because they each run
solid growth businesses growing 17% and
14% EPS respectively and are likely
acquisition targets of several RBOCs or
indeed of the new company created from this
bidding process.
6) If Qwest wins Frontier, one less US long-haul
fiber network will exist. This is a positive for
the entire US telecom services sector,
especially the long distance sector, in that it
reduces the number of competing LD
networks by one. It is ironic that 2 years ago
Qwest sold Frontier 24 strands of fiber on
13,000 miles for only $425 million, and now
seeks to buy it back for the equivalent of $6-8
billion. Nevertheless, consolidation is a good
thing for investors in the sector and we think
that is a positive.
7) Finally, we note Qwest appears ready to give
up its long distance revenue opportunity for
several years in the US WEST region (i.e.,
until 271 long distance approvals are gained).
This is in addition to its joint marketing deal
with BellSouth, wherein Qwest has ceded all
local revenues to BellSouth in the BellSouth
region. If Qwest wins USW, its appetite for
CLECs with properities in either US WEST or
BellSouth regions will be significantly
reduced, although Global Crossing's would be
significantly increased (or visa versa)!
Merrill Lynch is currently acting as a financial advisor and has rendered a
fairness opinion to US West Inc in connection with its proposed merger
with Global Crossing Ltd. announced on May 17, 1999.
US West Inc. has agreed to pay a fee to Merrill Lynch for its financial
advisory services, a significant portion of which is contingent upon the
consummation of the proposed merger.
The proposed merger is subject to approval by shareholders of US West
Inc. and Global Crossing Ltd.
This research report is not intended to (1) provide voting advice, (2) serve
as an endorsement of the proposed transaction, or (3) result in the
procurement, withholding, or revocation of a proxy. |
