Despite losing MCI auction, profitable quarter encourages Qwest
Having lost the auction for MCI despite its higher bid, Qwest now faces a future as telecom’s ugly stepchild. Not only will it have to compete against the two new megacarriers – Verizon/MCI and SBC/AT&T – it will have to do so with $15 billion in debt, the least-attractive region of any of the RBOCs, and virtually no presence in hot growth markets such as wireless.
These factors trumped the deal for MCI. Qwest made four offers for the IXC, all higher than Verizon’s and all turned down due to the carrier’s tenuous finances following 2002’s alleged accounting fraud. MCI ultimately stated that some of its largest enterprise customers would seek to end their contracts with the carrier should it choose Qwest’s $9.9 billion offer over Verizon’s $8.5 billion bid.
Despite the snub, Qwest remains encouraged, especially after reporting its first profitable quarter after five consecutive losing ones. CEO Dick Notebaert says the carrier is “aggressively” pursuing other opportunities to drive future growth.
He would not elaborate on what those options are, but said they may include picking up some of the assets divested by SBC/AT&T and Verizon/MCI as they integrate their operations under the watchful eye of the SEC and other regulators. Another opportunity, according to analysts, is a three-way combination of Qwest, Sprint and BellSouth. Qwest already has arrangements with both: It resells Sprint’s Sprint PCS wireless service and provides out-of-region long-distance facilities for BellSouth.
Sprint, however, is busy working out its $35 billion deal for Nextel so it’s not likely to make a run at Qwest. Even if it did not have its hands full with Nextel, Qwest — with its rural Rocky Mountain territory and huge debt — does not bring much to Sprint’s table.
And Sprint’s $33 billion market capitalization may make it too pricey for Qwest.
Another possibility is for Qwest to size up Level 3 to bolster its nationwide assets. Level 3 is considered to have one of the most advanced IP/MPLS networks in the world, and last summer it landed a huge IP VPN deal with Sears, Roebuck & Co. through reseller Computer Sciences Corp.
Qwest may also make a move for a smaller carrier with nationwide facilities, a focus on enterprise customers and little debt, like one that has emerged from Chapter 11 bankruptcy. A handful of carriers fit that profile: Global Crossing, Broadwing and XO Communications, among them.
Another option for Qwest is to unite with a foreign carrier looking to expand its presence in the U.S. market. Still another is linkage with a cable multisystem operator. Even though Qwest does not have the cadre of large enterprise accounts that AT&T or MCI have, it does have a few that could help an MSO gain entry into that market as well as the long-distance facilities.
Whichever direction Qwest goes, the company is buoyed by its most recent quarterly results that saw a net profit after five consecutive quarterly losses. Ironically, the profit is due to the $418 million sale of Qwest’s wireless licenses and assets to Verizon Wireless.
