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Qwest avowal hits stock
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March 6, 2000: 11:20 p.m. ET
Talks with suitor leads arbs to short shares again, as U S West deal looms
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NEW YORK (CNNfn) - Shares in Qwest Communications International dropped 6 percent Monday as arbitrageurs repositioned after the long-distance provider said it's committed to its $36 billion merger with U S West Inc. but acknowledged that a suitor has come calling.
Denver-based Qwest (Q: Research, Estimates) said Sunday it held buyout talks with an unidentified suitor, widely reported to be Deutsche Telekom AG. Qwest said its major shareholder, Philip Anschutz, would support a purchase by the unidentified telecom company.
But Qwest also said U S West must be on board for any other deal.
"Qwest has no intention of entering into a transaction with the major telecommunications company unless U S West reaches an agreement with that company for the acquisition of U S West on terms acceptable to it," said Qwest in a statement.
That statement was read by arbitrageurs, or takeover traders who bet on whether a merger will succeed, as a sign that Deutsche Telekom's chance of moving in on Qwest have dimmed.
Arbitrageurs usually bet that the shares in the buyer in a merger deal will fall -- a process called "shorting." Arbs sold short when word of the Qwest deal with U S West first surfaced. But when Deutsche Telekom emerged as a possible merger partner, Qwest went from buyer to target, and arbs were left vulnerable. So a suggestion that Deutsche Telekom's prospect of success had dimmed sent arbs short once again Monday. Shares of Qwest fell 4 to 60.
Qwest shares last week spiked following reports that Deutsche Telekom was offering at least $70 per share for Qwest stock.
Sources familiar with the matter told Reuters that Qwest Chairman and Chief Executive Joseph Nacchio and Solomon Trujillo, U S West's chairman and CEO, are expected to meet this week to discuss their deal and the talks with Deutsche Telekom.
Arbs have been scrambling
"It wouldn't be fun to be an arb right now," said Mark Bacurin, an analyst with J. C. Bradford & Co. in Nashville. "The arbs are now coming back in, thinking there's now more confidence in the U S West deal."
A source close to the matter told CNNfn Monday that Deutsche Telekom, Europe's largest telecom and the world's third-largest, would prefer to buy Qwest first and then work to fold in U S West. Denver-based U S West (USW: Research, Estimates) is the smallest of the regional Bell carriers known as "Baby Bells."
"The reason for doing this would be that the Qwest merger would take a shorter time period to close from a regulatory approval process standpoint," said Eric Strumingher, a telecom analyst at PaineWebber.
But trying to do it in two steps won't be easy - mainly because U S West shareholders aren't likely to bite. Shareholders of Qwest and U S West have already approved the deal, meaning that U S West has leverage in determining how a deal with Deutsche Telekom will be done.
For its part, Deutsche Telekom, if it were to try and wrest away Qwest, would face at best a public relations disaster and at worst hefty legal costs for such a move. But the price of buying Qwest and U S West would likely be north of $120 billion, based on their current market values, analysts said.
No strangers to unfriendly situations
Neither Qwest nor Deutsche Telekom is a stranger to hostile takeovers. Last year, Qwest wrested U S West out of its planned merger with Bermuda-based Global Crossing, while Deutsche Telekom lost in its bid to buy Telecom Italia to a rival offer from Olivetti.
Shareholders of U S West are slated to receive 1.7932 shares of Qwest stock - and based on current trading price of Qwest stock, U S West shares would be worth more than $100 each.
Shares of U S West fell 1/4 to 74-7/8, while American depositary shares of Deutsche Telekom (DT: Research, Estimates) fell 1-1/4 to 97-3/8 on Monday.
The U S West-Qwest merger still faces approval by the Federal Communications Commission. The merger is expected to close by mid-year.
Deutsche Telekom, which is flush with cash from recent stock offerings and is set to bring in even more through sales of stakes in its cable and Internet divisions, has been eager to become a global player in telecommunications. A purchase of a U.S. company is seen as a key part of that program. 
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