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Mergers & acquisitions

Verizon Merger Rumors Send Qwest Up

SAN JOSE, Calif. -- VON –- Rumors of a Verizon Communications Inc. (NYSE: VZ) acquisition of Qwest Communications International Inc. (NYSE: Q) swept through Wall Street this week, causing Qwest stock to spike up dramatically Thursday.

A source here at the VON show said a New York-based broker had told clients that discussions are under way between the two carriers, and that Verizon would soon tender an offer.

Verizon, of course, is saying nothing about the situation. “No comment on that,” Verizon director of technology policy David Young said with a smile in the hallway here at VON.

On Thursday Qwest stock closed the day up 22 cents (3.2%) at $7.09, a new 52-week high.

In morning trading Thursday, Qwest stock climbed 61 cents (8.9%) to $7.48, before dropping back down. For the past month, the stock had traded mostly in the $6.00 to $6.40 range. As late as March 13, Qwest stock was trading at $6.47. (See Qwest for Mediocrity.)

Observers have been watching closely for Verizon to respond to the planned merger of AT&T Inc. (NYSE: T) and BellSouth Corp. (NYSE: BLS). (See Ma Bell Is Back!.)

Most analysts have focused on the possibility of a Verizon buyout of Vodafone Group plc (NYSE: VOD)'s 45 percent share in Verizon Wireless. (See Verizon: All Together Now?.) For the time being Verizon shares control of the property with Vodafone, and Vodafone has made no sign that it's willing to sell.

But some good reasons may in fact exist for Verizon to buy Qwest, debt and all. (See Qwest Places $200M in Notes.)

With its acquisition of BellSouth, AT&T’s network will grow in size considerably. As a result, the balance of power in negotiating interconnection agreements may swing far into AT&T’s favor, a source here says. Verizon may be forced to increase the size of its network to regain "parity" at the bargaining table with AT&T.

Another observer points out that should AT&T swallow up Qwest, Verizon’s access to the West Coast interconnection points for international calling could be cut off. Today, Verizon connects calls through Qwest switches in Seattle for calls to the Pacific Rim. If AT&T owned all the interconnection points on the West Coast, connecting international long distance calls might cost Verizon a fortune in interconnection fees, the source says.

A Qwest representative was not immediately available for comment on this story.

One Verizon executive asked why his company would want to buy a bunch of access lines when Verizon’s real interest is to “do broadband.” But Qwest owns one of the country's best coast-to-coast fiber backbone networks, which could be leveraged by Verizon to expand broadband services throughout the combined company's footprint.

Qwest’s territory contains Denver, Salt Lake City, Minneapolis, Portland, and Seattle, but much of its footprint is sparsely populated. Still, the footprint includes developing areas such as the front range communities around Denver and the sprawl of new developments surrounding Salt Lake City. (See Qwest Nears UTOPIA.) These new developments represent a chance for large-scale greenfield fiber deployments over which high-dollar triple play bundles could be sold.

The progress of talks between Verizon and Qwest might be highly dependent on the progress of Verizon’s discussions with Vodafone. One Wall Street source doubted that Verizon would attempt to manage deals with Vodafone and Qwest at the same time.

— Mark Sullivan, Reporter, Light Reading

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Mark Sebastyn 12/5/2012 | 4:01:22 AM
re: Verizon Merger Rumors Send Qwest Up I'm a little surprised by this. Quick thoughts.

1. Defensive acquisition. Keeps Comcast from aquireing one of the last major backbone companies. This is going to increase the cost of the now inevitable purchase of Sprint by Comcast since they are now the only game in town for both wireless infrastructure and enterprise/backbone. If this rumor is true, Sprint is going to go out for a very pretty penny.

2. Verizon does not need another fiber backbone - they bought MCI and have that component. They have their hands full integrating it.

3. Therefore, it is the access lines that they really want. Consumers who are wedded to a 10-digit phone number are valuable. I've said this many times but people CONTINUE to underestimate the value of incumbent Telco customers.

I assembled my full thoughts on the post-telecom landscape here. Qwest was someone I had designated a wildcard.

http://www.nyquistcapital.com/...
mrbhagav 12/5/2012 | 4:01:17 AM
re: Verizon Merger Rumors Send Qwest Up
Scmitt, I agree with you. If VZ wants a fiber backbone, they should buy Level 3 and not deal with the outside plant burden of Qwest access lines. It must be the access lines and the subs at the end of them driving the rumored marriage. The economics are better driving fiber closer to these new subs and capturing more of the tripe/quadruple play market.
Mark Sullivan 12/5/2012 | 4:01:04 AM
re: Verizon Merger Rumors Send Qwest Up A VON show attendee asked the following question of Qwest CEO Notebaert: "Now that AT&T and BellSouth will combine, will AT&T control such a big network that they can bully their peers on the terms of interconnection agreements?" Notebaert dodged the question, but could it happen?
Mark Sullivan 12/5/2012 | 4:01:04 AM
re: Verizon Merger Rumors Send Qwest Up "Another observer points out that should AT&T swallow up Qwest, VerizonGÇÖs access to the West Coast interconnection points for international calling could be cut off."

Is this a real threat to Verizon or are there other ways of connecting international calls even if the West Coast is cut off?
RTL Rules 12/5/2012 | 4:01:04 AM
re: Verizon Merger Rumors Send Qwest Up Deliver me from analysts, "observers" and self-styled pundits.

I can't imagine any telco. could "turn off" (or vastly overprice) access to Asia for most of the USA and get away with it. The real customer, after all, is not another telco.

Incidentally, who owns the fiber to Europe?

RTL


ps AT&T has fiber from Manchester (Point Arena), CA to Hawaii. Does it have fiber from Hawaii to any point in Asia?
RTL Rules 12/5/2012 | 4:01:03 AM
re: Verizon Merger Rumors Send Qwest Up I just found out that fiber from the Manchester (Point Arena) station connects to Vancouver BC and Japan, in addition to Hawaii.

RTL
minnecool 12/5/2012 | 4:01:02 AM
re: Verizon Merger Rumors Send Qwest Up

1) Asia interconnection points? Are you clowns nuts? Verizon bought MCI which owns the second largest international communications company (MCI International) Qwest is WEAK in its international assets, Verizon is already strong. Who starts this silly poppycock anyway?
2) Telco access lines are like owning sand. Demographics is destiny. Our new generation is NOT buying traditional phone lines. They live for video and are going satellite or cable. They love their 1000 anytime minutes on T-Mobile.
3) Comcast buying Sprint? Another nutty idea reflecting the poor quality of this board. Comcast's market cap is $22.1 Billion, Sprint Nextel=$75.1 Billion - who is buying who?

Please people, get your acts together!

The private equity boys will take out Qwest, combine it with the new Alltel and Sprint local wireline service divisions. Slash, cut, and burn overhead, generating a cash flow machine which will go public in two or three years.

Mark Sullivan 12/5/2012 | 4:00:59 AM
re: Verizon Merger Rumors Send Qwest Up Minnecool - Your points about Verizon/MCI international assets are good ones, but I'm not sure you completely refuted the "Asia interconnection points" arguement posed by the source in the article. By what hops exactly does a call from a Verizon customer in New Jersey make it to a destination in Tokyo? On what peering agreements does that call depend to be connected?
telco1158 12/5/2012 | 4:00:57 AM
re: Verizon Merger Rumors Send Qwest Up Qwest local access loops do not look enticing with all that legacy equipment and outside plant issues. It will take years before anyone who buys Qwest can make full use of its network. In the meantime, WLL will be a viable option for local loop access, so who needs old twisted pair access except the ILECs?
telco1158 12/5/2012 | 4:00:57 AM
re: Verizon Merger Rumors Send Qwest Up The largest one I know of is PC-1 (Pacific Crossing1) run by PCL, of which Lucent is a major partner along with Alcatel.

Pc1 was turned up around the time of Y2K hype, but saw no trouble. It stretches from Japan to two points in the US: near Los Angeles and Seattle.
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