Thursday, June 08, 2006

DSL Prime: Qwest for Sale

Dave Burstein of DSL Prime reports that Qwset is for Sale: "Dick Notebaert, Qwest CEO, is a very effective and careful public speaker. He knows exactly what he wants to say, and I read this interview with Ken Belson in the NY Times as an invitation to bid for the company.
  • Belson: Might you be more of an acquisition target?
  • Notebaert: If I looked at it as a consultant or an adviser, I would look at Qwest today and say most of the things that made me uncomfortable before are gone. Again, the government ­ at every level we're O.K. The debt load's down, profitability's up. Everything's squared away and there's no threat of bankruptcy, which you might have thought about a few years ago. And the company has solid performance characteristics. And it's throwing off good cash. It's profitable. And it's got a wonderful group of employees. So I don't think we're unattractive.
  • Phil Anschutz, who controls 16% of Qwest, resigned from the board three months ago and so did his aide, Cannon Harvey. Time would give Anschutz credible denial of inside information when he sells. His $1.5B sale while Chairman during the midst of the “$44B accounting fraud” created talk of an indictment, so he has to be very careful and resigning from the board would cya. Notebaert’s comment I take as confirmation.
  • The logical buyer is Deutsche Telecom, which five years ago was ready to pay over $80B for the company. Because they have a mobile network in the U.S., there’s a natural synergy. AT&T and Verizon/MCI, on the other hand, duplicate Qwest backbone assets. Sprint is spinning off wireline assets, not adding to them.
  • Qwest’s desperately low capital spending is the third reason I think Anschutz and Notebaert want out. Qwest capex is 45% lower than depreciation, leaving the network increasingly obsolete and vulnerable to competition. That props up income in the short run, allowing the company to report the first (very modest) profit in several years, fully audited and conforming to GAAP as far as I know. ..... What I’m seeing is an investment cutback that legitimately creates earnings but leaves the company extremely vulnerable. A quick getaway makes sense.
  • A more cynical way to look at it is Notebaert and Anschutz are smart enough to sell before cable VOIP, Seattle and Utah municipal networks, and wireless substitution clobber the company.
  • One of Qwest’s major challenges is the greater capital resources and customer power of SBC/AT&T and Verizon/MCI. Not long ago, Qwest bid more than the company could afford to try to keep MCI away from Verizon. The nearly universal comment was Qwest was dead if they lost the bidding war. Few of those doubters have said anything about Qwest rising to new highs on the stock market. The effects on Qwest’s income of the backbone takeovers may not be so dire, however; AT&T and Verizon now control so much of the backbone and enterprise voice market they may be forming an effective cartel and driving up prices, a story I’m trying to understand.
  • One enticement to buyers is Qwest’s apparent success in winning a large government subsidy through the so-called “universal service fund”, most of which is just an incumbent subsidy. D.C. insiders are already calling the new proposals the “Qwest welfare agreement,” based on currently leaking details. That money will be shoveled straight to investors, not used to improve the service or prices for rural service.
  • This item is not based on either wall street rumor or an insider leak. I’m going solely on Notebaert’s comments and the analysis outlined above. I don’t think a deal is in sight very soon, and know things could easily change.

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