MCI’s decision to accept a sweetened offer from Verizon deals a staggering blow to Qwest Communications’ vision for growth and recovery. But it shouldn’t send the local phone company into a tailspin. Indeed, in the future it won’t seem so jarring to see Qwest in the hunt for an acquisition.
MCI rejected Qwest’s final $9.8 billion offer in favor of a lower bid from phone behemoth Verizon Communications. Qwest wisely decided to walk away rather than pay too much. Verizon offered MCI a safe haven, not so burdened by debt.
Qwest isn’t sulking in the corner, though. On Tuesday, CEO Dick Notebaert told a group of analysts in a conference call that several companies will be looking for a “meaningful third leg” in the wake of telecom mega-mergers such as Verizon-MCI and SBC Communications Inc. and AT&T.
“The market is full of great opportunities,” Notebaert said. “There are a number of opportunities in our sector, a number of companies, a number of businesses.” He didn’t elaborate, but he had earned a fair measure of credibility with his pursuit of MCI.
As investors considered Qwest’s prospects, its stock was down only a penny, closing at $3.46 a share on Tuesday.
Qwest, smallest of the Baby Bells created in the 1984 breakup of AT&T, saw MCI, with large corporate and government customers, as a way to grow as its core local phone base is eroding. Because Qwest is one of Colorado’s biggest employers and its largest provider of local phone service, its vitality is important to the community.
Qwest’s survival could very well depend on its response to the MCI setback.
Many industry analysts say all is not lost for Qwest. “They’ve proven to have a very able management team that’s willing to take risks,” said Scott Cleland, chief executive of Washington, D.C.-based Precursor Group. “They’ve made more with less than anybody in the industry.”
(Qwest earned $57 million in the first quarter of 2005, compared with a $310 million loss a year ago.)
Cleland says, “It’s not a question of survival. It’s a question of finding a way to grow. Notebaert brought the company back from three hours away from bankruptcy when he arrived.”
Qwest may have opportunities to pick up pieces divested by regulators from the burgeoning mergers of the telecom giants. Or possibly smaller high-speed data networks like Broomfield-based Level 3 Communications. Donna Jaegers of Janco Partners of Denver notes that companies like Time-Warner Telecom and Excel Communications, though smaller than MCI, might be attractive targets for Qwest.
Qwest itself isn’t likely to be acquired – its $17 billion in debt is “certainly an obstacle,” Jaegers said. And “there aren’t a whole lot of eligible suitors. SBC’s buying AT&T; Verizon’s buying MCI; Sprint’s buying Nextel.”
Independent analyst Pat Comack of Miami questions Qwest’s long-term viability but thinks the Denver firm may yet have a shot at MCI if MCI shareholders or federal regulators reject the Verizon deal.
It may be just as well that Qwest move on and set its sights on Plan B.
