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Qwest stumbles on US West, Frontier bids

Shares of Qwest Communications International Inc. (Nasdaq: QWST) tumbled nearly 18 percent Monday after the company made an unsolicited bid for US West (NYSE: USW) and Frontier Corp. (NYSE: FRO), two companies that have agreed to merge with Global Crossing Ltd. (Nasdaq: GBLX).

In early trading Monday, Qwest fell 7 13/16 to 37 1/16 and Global Crossing dipped 11/16 to 50 1/16. Frontier gained 3 9/16 to 59 and US West added 3 1/8 to 58. See comparison chart.

Qwest said its offer was "financially and strategically superior to Global Crossing's pending transactions," but investors balked at the premium.

On a conference call, Qwest chief Qwest CEO Joseph Nacchio played down today's stock movement. "We've talked to our largest shareholders and they have not sold shares," said Nacchio. "When WorldCom bid for MCI it took a significant dip. A lot of long-term strategic deals send shares down on the first day."

Nacchio added that Qwest anticipated that it would lose some shareholders as it transitioned from a high-flying upstart to a large capitalization global player. "We anticipated that we'd roll some of the investor base," he said. "It's better to do it sooner than later."

Qwest is offering to pay $55 billion for the two companies and assume $11.4 billion in debt. Qwest's offer is a 46 percent premium to US West's closing price Friday and a 35 percent premium for Frontier.

Nacchio said the premiums were a fair value for the companies.

The combined companies would have $22 billion in year 2000 revenue, a market cap of $87 billion and 71,000 employees.

Shareholders may be reacting to this simple fact: The bidding war is far from over. For Global Crossing, losing out on the Frontier and US West acquisitions could relegate the company to being a niche player while Qwest moves up to take on the likes of MCI WorldCom Inc. (Nasdaq: WCOM).

Nacchio wouldn't speculate on a Global Crossing competing bid. "They will make the smart and right choice for them," he said.

In another twist, Qwest's offer pits two former top AT&T executives, Nacchio and Global Crossing CEO Robert Annunziata, against each other. Nacchio played down and personal conflict and called it a "line of fiction."

Qwest outlined a host of synergies, but Wall Street wasn't listening.

Among the synergies cited by Qwest:

  • Savings of $14 billion through the year 2005;

  • Annual revenue growth of between 15 percent and 17 percent after Qwest receives approval to provide long-distance service in the US West region;

  • And accretive earnings per share in the first year after completing the US West acquisition. The purchase of Frontier could be completed by December with the US West acquisition closing in mid-2000.