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BellSouth takes stake in Qwest

BellSouth says it will acquire a 10 percent stake in Qwest in hopes that the strategic alliance will accelerate the companies' efforts to provide next-gen digital communications services.

Regional phone company BellSouth said today that it would invest about $3.5 billion to acquire a 10 percent stake in No. 4 U.S. long distance phone carrier Qwest Communications in hopes that the strategic alliance will accelerate the companies' efforts to provide next-generation digital communications services.

As part of the agreement, BellSouth will invest about $3.5 billion at $94.50 a share of Qwest stock, representing a 15 percent premium on Friday's closing price of $82 per share.

Qwest will issue nearly 20.4 million new shares to BellSouth in exchange for approximately $1.93 billion in cash. Qwest's principal stockholder, Anschutz Company, will sell 16.65 million shares to BellSouth for about $1.57 billion. This will reduce Anschutz's ownership interest in Qwest to approximately 39 percent.

"This is a significant step in our objective of becoming the premier data communications provider to our customers," BellSouth chief executive Duane Ackerman said. "This relationship allows our customers to enjoy the range of benefits from a comprehensive set of Internet and broadband digital solutions.

"[The alliance] is pretty much directed toward the high-end of our market, meeting the needs of our large business customers and their data-product needs," added Ackerman during a telephone press conference. "[It will] not have a significant impact on the consumer."

BellSouth previously had been interested in a group that would buy Pointcast, to help form a high-bandwidth strategy. But, as reported, that deal never materialized.

Ackerman, however, said today there was no cause-and-effect relationship between the failed Pointcast talks and today's deal with Qwest.

Qwest and BellSouth will immediately begin coordinated marketing of services, with Qwest offering its portfolio of data networking, Internet, and voice services, while BellSouth will offer local networking services.

BellSouth is hoping that once the company is allowed in the long distance business, the companies will jointly develop and deliver end-to-end, high-speed data, image, and voice communications services to business customers, with a heavy emphasis on the fast-growing broadband and Internet-based data services.

"The reality among us at BellSouth is that we realize that we need to partner up to get knowledge and skill sets in the longhaul, high-speed future digital world," said Bill Reddersen, group president for value added services at BellSouth. "And I think Qwest realizes that they need to partner up to get strength and knowledge of the local world."

BellSouth has challenged the constitutionality of the 1996 Telecommunications Act which restricts regional Bells' entry into the $70 billion long-distance market. The company has also challenged the Federal Communications Commission's refusal to let the company into the long-distance market. A federal appeals court rejected the company's challenge in December.

BellSouth is currently in a prerelief mode--a period of time before it has permission to enter the long-distance business. Whether BellSouth would have acquired a larger stake in Qwest if not hampered by regulatory restrictions is an open question.

"Just as a matter of fact, we could not have moved beyond a 10 percent [equity stake] anyway," said Ackerman. "Having said that, our basic philosophy all along has been to create or search for alliances that would enable us to address the needs of our customers, enable us to grow and add value without owning all the assets."

The companies also pointed out that after BellSouth receives approval to offer long-distance data and voice services, the agreement will enable both of them to use each other's assets to develop infrastructure and distribution capabilities in their respective markets across the globe.

BellSouth has extensive operations throughout Latin America as well as a significant presence in Europe. Qwest has a stronger presence in Europe and is beginning to move into the Asia/Pacific and Latin American regions.

Today's deal comes in the wake of failed negotiations between PointCast and a consortium of local phone companies, including BellSouth, to create a high-speed Internet access venture dubbed "Project Newnet."

The plans for a consumer-focused, high-speed Net service that linked PointCast's content and push technology with telcos' high-speed DSL networks was the telco's answer to @Home's cable service.

The relationship announced today will also use the strategic alliances each has with key Internet and technology companies including Microsoft, Cisco Systems, and Lotus, to the customers' advantage.

"Given the rapid change occurring in the communications industry today, there is no doubt that together we have the potential to be an even more significant driving force," said Ackerman.

The equity aspect of the transaction is subject to Hart-Scott-Rodino review and the deal is expected to close by the end of May. The companies don't expect any hurdles in the approval process.

"We have carefully structured the alliance to try to address the rules and spirit of the Telecommunications Act, and the period of time before we get long-distance relief as well as after that relief is granted," said Ackerman.

Shares of both companies reacted positively to the news of the alliance. BellSouth stock edged 2.43 percent or one point higher to 42.19. Shares of Qwest jumped 3.81 percent or 3.13 points to 85.13 in early trading.