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Qwest plans to forge ahead with telco bids

Despite its initial rejections, the long distance firm is persisting in its bid to merge with US West and Frontier, both of which have left open the possibility that they could change their minds.

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The bidding war over the future of US West and Frontier is settling down to a simmer, but the heat isn't off the two companies yet.

Qwest Communications has now been rebuffed by both target companies, after first intruding on their agreement to merge with rival Global Crossing.

Despite the initial rejections, Qwest is persisting in its bid to merge with US West and Frontier, both of which have left open the possibility that they could change their minds.

"[Qwest CEO Joseph] Nacchio is very tenacious," said Brian Adamik, a senior telecommunications analyst with the Yankee Group. "He won't go away. He's got to be a salesman now, and sell US West's board on his offer."

Nacchio sent a letter to US West's chief executive Sol Trujillo today, expressing his disappointment and pushing for a reversal of US West's decision.

"Apparently, your Board has not fully considered the benefits of our offer, which we believe is financially, structurally, and strategically superior to Global Crossing's offer," Nacchio wrote. "We look forward to discussing our proposal with you."

Qwest's next moves
Qwest has consistently returned to the argument that its all-stock offer for US West and Frontier is better for shareholders, despite the precipitous drop in its share price after making the bid.

"We're disappointed by the actions of US West," said Qwest spokesman Tyler Gronbach. "We also think they're doing a disservice to their investors, employees, and customers."

Qwest says its offer still contains a premium of about 4 percent to 7 percent over Global Crossing's bid, based on stock price fluctuations. But more importantly, Qwest's network is more advanced than Global Crossing's fiber-optic grid. Qwest holds that a pairing would allow US West to fulfill its goal of becoming a premier data and communications carrier much faster, Gronbach said.

Some industry observers have speculated that US West would prefer the local-national-international combination it would gain by a three-way merger with Global Crossing and Frontier, which Global Crossing also intends to buy. But Qwest also has a European presence, albeit relatively new.

"We believe we accelerate their strategy," Gronbach said. "We've already built two fiber-optic rings in Europe?We've got the assets in place to jump start their plan. In terms of leveraging assets, in terms of what you can offer today with Global Crossing, it's not there. We give them something today, not tomorrow."

But other observers wonder whether US West's Trujillo feels uncertain about his potential role under a company run by Qwest's Nacchio. In its rebuff of Qwest's offer yesterday, US West raised concerns over a loss of direct control.

Qwest has offered Trujillo a vice chairman role on the proposed firm's board of directors. But US West dismissed Qwest's offer before serious negotiations could take place, Gronbach said.

"We haven't had a chance to talk to the US West management team about structuring," he said. "We haven't even had a meaningful dialogue yet."

"If [US West management] is looking out for the interests of their shareholders it shouldn't matter [what their future role at Qwest might be], but it's got to be in the back of their mind," said Mark Bacurin, a financial analyst that follows Qwest for J.C. Bradford.

Analysts do not expect Qwest to sweeten the offer, however.

"I'd be surprised to see them increase the price," Bacurin said. "But they could come back with a collar mechanism offering a certain value, or essentially more shares, if their stock price falls below a certain level."

Sequel in the making? Financial analysts, who have largely opposed Qwest's actions, say it may be in the companies' best interest to lose the bidding war.

Even if its proposed purchases fall through, analysts say Qwest would be no worse off than it is today. The firm, strategically placed with a new fiber-optic network and a strong management team, is viewed by many as a future high-flyer in the communications and Internet industries.

"I don't think it hurts them. It just leaves them where they are today, and that's already a pretty compelling growth story," Bacurin said.

The company has plenty of opportunities to strike other strategic partnerships--like its deal with BellSouth--to help send traffic across its network, analysts said. Making a deal with one or more of the big European telephone companies, such as Cable & Wireless or Deutsche Telekom, would make more sense than buying US West, said Davenport analyst F. Drake Johnstone.

Further down the road, BellSouth could also buy Qwest, in a deal that would likely be received more warmly by Qwest investors, Johnstone added.

But a loss in today's bidding war could have some downside, as some investors may be concerned that Qwest lacks something it believed it needed in US West or Frontier, some analysts said

"Maybe it causes some nervousness about is there something wrong with the business," Bacurin said.

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