Qwest left to watch again

Once again, consolidation in the telecom industry has left Qwest a spectator on the sidelines.

Despite speculation that Qwest may now be an acquisition target following AT&T’s $67 billion bid for BellSouth, analysts feel the carrier will be left on its own just as it was when it lost the bidding war for MCI to Verizon. Unless certain specific conditions prevail, Qwest’s unappealing region, burdensome debt and lack of wireless assets will relegate the RBOC to bystander, not bought.

“Qwest is definitely the orphan Bell,” says Donna Jaegers, an analyst at Janco Partners in Denver. “I really don’t see Qwest as an attractive acquisition target for several years.”

Speculation was rife this week that Verizon would scoop up Qwest as a bold response to AT&T’s engagement with BellSouth. There was also talk that AT&T would court Qwest as a way to expand its footprint in the West and keep the carrier from Verizon.

But analysts say neither scenario is likely. Qwest is more likely to stand alone and make small acquisitions itself, as it pledged to do after losing the bidding war for MCI.

“The one thing that Qwest has is its local franchise, and over the next two years it’s going to become increasingly embattled as (cable company) Comcast starts rolling out more aggressively with their digital voice service,” Jaegers says. “I don’t think they get acquired at all.”

Not unless Verizon views AT&T’s acquisition of BellSouth as a threat in wireline, vs. wireless. AT&T has made it clear that the impetus for the BellSouth acquisition was to gain full control over Cingular Wireless, which is co-owned by AT&T and BellSouth and could be a significant driver of future growth for both carriers.

But AT&T will also gain control of BellSouth’s 3 million DSL subscribers, which will increase AT&T’s DSL line count of 7 million by almost 50%, maintaining its DSL leadership in the U.S. And this is where ‘Net Neutrality comes into play.

If ‘Net Neutrality does not become law — meaning content providers’ ability to deliver high-bandwidth content to broadband subscribers will be at the mercy and price structure of the carriers — then it may be beneficial for Verizon to pick up Qwest’s 1.5 million DSL customers to add to its own 5 million broadband lines.

If ‘Net Neutrality becomes law and carriers are precluded from charging additional fees for or blocking high-bandwidth content, “it so discourages the prospects for return on investment for wireline infrastructure that it almost mandates that the carriers shift to a wireless strategy,” says Tom Nolle, president of consultancy CIMI in Voorhees, N.J. “Qwest has no value in that space.

“Ironically, they’re a hostage to ‘Net Neutrality,” Nolle says of Qwest.

While waiting for that issue to settle, Qwest is considering options, including acquisitions inside and outside of telecom, while maintaining the value of its assets for shareholders:

“We continue to watch industry consolidation with interest as we remain focused on customer service and operational excellence to enhance Qwest’s shareholder value,” a spokesman said.

What Qwest needs, according to Jaegers, are more out-of-region local assets and more long-distance customers.

“If they could find a company that has a lot of enterprise customers, uses leased networks so that Qwest could bring them over to their own network, that might make some sense.”

But others believe Qwest will go a different route.

“I think they make a stretch outside of telecom, something like cable, and it’s a consumer play,” says Sean Hackett, an analyst at IDC. “In their geographic region, they just don’t have many big business customers out there. I don’t think they’re an acquisition target. I don’t think they have many options at this point.”