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Qwest eyes US West, Frontier
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June 14, 1999: 5:33 p.m. ET
Combined $55 billion bid could sink offer by rival Global Crossing
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NEW YORK (CNNfn) - A $55 billion unsolicited takeover bid by Qwest Communications International for US West Inc. and Frontier Corp. sets up a possible bidding battle in the rapidly consolidating telecom industry, analysts said Monday.
Denver-based long-distance company Qwest (QWST) announced its rival bid late Sunday, topping Global Crossing Ltd. 's (GBLX) $42 billion stock offers for US West (USW), a Baby Bell carrier also based in Denver, and for Rochester, N.Y.-based long-distance carrier Frontier (FRO).
Global Crossing and Qwest -- telecommunications upstarts that have largely fueled their growth through high-flying stock -- both are eyeing US West and Frontier in an effort to wrap local, long-distance and high-speed Internet delivery services together. The goal is to create a company that could compete with telecom titans such as AT&T Corp. (T) and MCI Worldcom Inc. (WCOM).
Investors, however, expressed fears that the deal would harm Qwest's earnings, sending the company's shares down 10-3/4 to close at 34-1/8. The 24-percent dive drove the value of its paired offers down to $43 billion, wiping out most the perceived advantage Qwest had over Global Crossing's bids.
Ironically, the drop in Global Crossing's stock, in part, afforded Qwest an opportunity to make more attractive bids for US West and Frontier.
Performance of Qwest stock over the past year
Stock in Bermuda-based Global Crossing fell 3/8 to close at 50-3/8. Global Crossing shares have dropped sharply since the company announced its planned merger with US West on May 17.
US West shares rose 3-1/8 to finish at 58 and Frontier rose 1-15/16 to 57-3/8.
Qwest chief executive officer Joseph P. Nacchio said Monday that his company was confident it had a superior offer on the table.
"We've had a long term relationship with both companies," Nacchio said in an interview with CNNfn. He also said that while Qwest intends to pursue the acquisition of both companies, the offers are separate.
"Either of them would be a good acquisition," he said.
Frontier and US West acknowledged that they have received offers from Qwest and would review them, but declined to comment on the bids.
In a statement, Global Crossing said it expects to complete its deals with both US West and Frontier.
"Our existing US West merger agreement is superior to Qwest's offer, and we fully expect to close it as planned next year," Global Crossing said. "Our existing Frontier merger agreement is also superior to Qwest's offer, and we expect to close it as planned in the third quarter of this year."
Under Qwest's offer, the company would pay about $41.3 billion in stock for US West and $13.6 billion in cash and stock for Frontier. Qwest also would assume about $10 billion in US West debt and $1.4 billion in Frontier debt. If Qwest's offer is accepted, the deal would solidify its position as the fourth-largest long-distance carrier in the country.
Tough deal to match
Analysts said Qwest's bids represented a much better offer than Global Crossing's proposals.
"This is a superior merger because it makes more sense strategically," said Eric Strumingher, a telecom analyst at PaineWebber. "Qwest is also a more substantial company -- larger in terms of size, employees, revenues and fixed assets."
Another analyst, Phil Wohl of S&P Equity Group, said he doubted that Global Crossing would be able to match the bid.
"I don't think they have a shot now," he said. He said Global Crossing has been hit hard by its stock falling about 15 percent over the past month and probably does not have the funds to counter the cash portion of Qwest's bid for Frontier.
Performance of Global Crossing shares since announcing US West deal on May 17
While Qwest's stock fell on the news Monday, Wohl said he is little concerned by the drop because Qwest has the strength of BellSouth Corp. (BLS) behind it. Atlanta-based BellSouth bought a 10 percent stake in Qwest earlier this year under an arrangement in which the companies teamed up to provide Internet-based broadband services.
"They're the dominant player in this transaction," he said of BellSouth. He said the company would have tried to purchase US West and Frontier itself if it could be assured of regulatory approval.
But another analyst, Tom Burnett of Merger Insight, said Global Crossing should not be counted out just yet.
The Qwest bid "may well bring Global Crossing back into the picture here," he said. "Companies don't give up that easily." He said US West now might be able to negotiate a deal with Global Crossing that is more acceptable to its shareholders.
Existing deal not exciting to investors
Analysts said the US West-Global Crossing deal was in trouble because investors did not see the benefits of the combined company. Investors also were dubious about plans to create a separate tracking stock under the deal, and to appoint US West chief Solomon D. Trujillo and Global Crossing chief Robert Annunziata as co-CEOs of the combined company.
Global Crossing and US West have said they plan to link long-distance data services with the existing local service that US West already provides its 25 million customers in the West and Midwest. But, Wohl said, Qwest would be in a better position than Global Crossing to offer these types of services together.
Frontier also is key to Qwest's offer, Strumingher said. "If Frontier does not agree to merge with Global Crossing, then the Global Crossing-US West merger probably falls apart," he said.
In its bid for US West, Qwest offered to exchange 1.738 shares of its stock for each share of US West. The deal would be worth $80 per share if Qwest buys Frontier, or $78 per share if it does not.
Qwest also offered $20 per share in cash and 1.181 shares of Qwest stock for each Frontier share. The common stock component will be increased to 1.226 shares if Qwest and US West reach an agreement. The transaction is worth $75 per Frontier share if US West accepts Qwest's offer, or $73 per share if it does not.
The new company would have a combined market capitalization of $87 billion, and Qwest said it would result in savings of $14 billion over five years.
While Qwest said the transactions would boost earnings per share in the first full year after closing, the company said Monday that it would post $1.8 billion a year in charges for 30 years to write down goodwill -- which is the difference between the amount paid for a company and the tangible value of its assets.
Qwest said it expected to complete the Frontier deal in December and the US West purchase by the middle of next year. US West would have to pay a breakup fee of $850 million if it pulls out of its deal with Global Crossing, according to the terms of the May 17 agreement.
Qwest's bid for US West also would face several hurdles on the regulatory front. Baby Bell carriers are not allowed to provide long-distance service in their home regions until they prove to government authorities that their local markets are open to competition.
In its announcement Sunday, Qwest said that it is prepared to sell its long-distance assets in US West's region or postpone revenue it earns in that region until US West receives approval to offer long-distance service there.
-- from staff and wire reports
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Qwest Communications
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