Optical/IP Networks

KPNQwest for a Buyer

KPNQwest NV's (Nasdaq/Amsterdam: KQIP) network, which serves approximately 40 percent of the European market, is up for grabs. Who might buy it is far from clear.

Last week the carrier filed for protection from its creditors in a Dutch court (see {doclonk 16515} and KPNQwest Ready to Kick the Bucket?). And today, after the Netherlands-based telecom warned that its customers should start shopping around for other service providers in case of “significant deterioration in the performance of KPNQwest EuroRing network,” rumors started running wild about its fate (see KPNQwest Founders).

KPNQwest has refused to reveal who the interested parties in its network are, only stating that it doesn’t expect an agreement to be reached for at least the next three to five weeks. AT&T Corp. (NYSE: T), British Telecom (BT) (NYSE: BTY), COLT Telecom Group PLC (Nasdaq: COLT; London: CTM.L), Hutchison Whampoa Ltd., Swisscom, and Verizon Communications Inc. (NYSE: VZ) are among the rumored potential buyers, according to various news reports.

AT&T appears to be the favorite candidate. Sources have said that the largest U.S. long-distance company has made an offer of approximately $200 million for the network, which KPNQwest spent about $1 billion building.

"It wouldn’t surprise me that AT&T could snap them up at 20 cents on the dollar,” says Davenport & Co. analyst F. Drake Johnstone.

AT&T would not comment on whether or not it has made an offer. Observers, however, agree that AT&T is one of the most likely U.S.-based companies to join the bidding round, pointing out that the company recently stated on an earnings call that it is interested in expanding its international presence through asset purchases.

From a competitive standpoint, it would be a good move, Johnstone says. “All of a sudden, Qwest doesn’t have a European network,” he says, “and AT&T does.”

Qwest Communications International Inc. (NYSE: Q), which already owns about 40 percent of the Dutch telecom, is in no position to buy the network. It has already written off its prior investment and pulled the plug on support of KPNQwest. Even if it had wanted to reinvest in the European company, it doesn’t have a choice in the matter, observers say. “They’re trying to get their own house in order,” Johnstone says.

Qwest's credit rating was cut to junk today for the second time in less than a week. The Moody's Investors Service’s credit rating cut today followed last week's Standard & Poor's cut (see Qwest Trashes Junk Rating). A $26 billion debt load and an ongoing Securities and Exchange Commission (SEC) investigation into its accounting practices are among the other problems the company is dealing with (see Qwest Posts Loss, Preps Asset Sales).

In that respect, AT&T is in much better shape. Still, AT&T also saw its debt downgraded by Moody’s today and ended up only notches above junk status itself. “Buying money is just going to get more expensive,” says Frank Dzubeck, President and CEO of Communications Network Architects. “The problem is that this is not a stock acquisition, it’s a monetary acquisition... AT&T has its own problems.”

At a fire-sale price, Dzubeck says, AT&T could certainly afford to buy the network, but he points out that even if the company only has to put up a few hundred million dollars, it will also have to commit to servicing KPNQwest’s approximately €2 billion debt. “It’s all a matter of numbers,” he says.

Among the European service providers, many observers think that British Telecom is a strong bet. The company issued a statement today saying that it is ready and prepared to help as far as possible “KPNQwest’s customers respond to the critical uncertainties they are currently facing.” A company spokesperson would not, however comment on whether BT might be considering purchasing all or parts of the KPNQwest network.

Swisscom is also a good candidate, Dzubeck says. “It’s one of the rich telecoms and has always had aspirations of extending its reach outside of Switzerland,” he says. “It’s the lurker outside of the European Union.”

Analysts aren’t limiting their speculations to the Western Hemisphere. Hutchison Whampoa, the Hong Kong-based company, which along with Singapore Technologies Pte. Ltd. lost a $750 million bid for bankrupt telecom Global Crossing over the weekend, should not be underestimated, observers say (see Global Garage Sale Coming? ).

Amidst all this speculation over which companies may be considering buying the European network, there remains uncertainty over whether or not there will be a complete, functioning network to buy. Operation of the network is sure to suffer if the company doesn’t raise cash fast, and there is always the possibility that it will be forced to sell off its network in pieces.

Dzubeck says it’s not likely that the network will be shut down. “It’s prudent business,” he says of the warnings of a potential shutdown. “It stops lawsuits. And it is also a threat. They’re saying, ‘You could lose customers if you don’t make a move right away.' ”

— Eugénie Larson, Reporter, Light Reading

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