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