According to several sources, q is actively seeking a buyer for its longhaul network. I’ve lost track of how many times this has been rumored over the last 5 years, is it an even dozen yet? But anyway, the rumored price is in the $2-3B range, and although it isn’t clear just how much of Qwest would be part of such a deal it surely isn’t doing over $2B in revenues, nor is that part likely to have EBITDA above the 10-20% range. Hence, the EV/EBITDA ratio for such a sale would probably be well above current market valuations. Let’s take a look at the potential suitors in some detail:
- Level 3: That Level 3 Communications (NYSE:LVLT, news, filings) has always wanted the Qwest assets is well known, and the deep pockets they always seem to have access to in a pinch cannot be ignored. However, I’m sorry I just can’t make this deal work financially. Even from the friendliest of hands, to raise $2B LVLT would need to pay 10% interest *and* give away half the company. And even if they could find the cost savings to justify that, they would be able to find far more by buying glbc with the same money. Probability: Very Low.
- TW Telecom: If TW Telecom (NASDAQ:TWTC, news, filings) wants a backbone to go with its metro assets, they might be interested I guess. But with XO Holdings (news, filings) at much lower valuations and a more favorable fit in many ways, I doubt it. Like Level 3, TW Telecom would need big friends to find the money for such a deal, and that money is just too expensive whether it comes in the form of dilution or interest payments. Probability: Very Low.
- Global Crossing: The US backbone of glbc runs on 24 fibers on the Qwest network, thus they might have an easier time integrating the assets than anyone else. And with their backers in Singapore, raising the money might even be possible. But if John Legere had $2B to spend on assets in the USA he would surely put it to use buying assets that would increase margins there – i.e. metro rings etc. Probability: Very Low.
- AT&T and Verizon: That both AT&T (NYSE:T, news, filings) and Verizon (NYSE:VZ, news, filings) could buy Qwest longhaul any time they want is a given, it would be pocket change. But do they want it? Do they need it? What does it help them do? The cost savings alone would not justify the deal any better for them than for the smaller guys above. The only reason they might need or want Qwest is that their own backbones might run out of room someday, and Qwest has those two extra conduits nationally. In other words, they would need to be taking a longer view than seems likely right now in the depths of a recession. And why incur the wrath of regulators at the new FCC when you don’t have to? Probability: Medium.
Well who then? I think the media is not looking globally enough yet – the real buyers (if they exist) are those with the following: 1) billions of cash, 2) US assets to combine for cost savings, and 3) a long term view of the assets. I see no indication that any European giants are looking beyond their continent, but in Asia it’s a different story.
- Tata or Reliance: The Indian carriers may have less available cash now than a year or two ago, but they still have enough to get things done. Reliance is the more likely of the two, because they have already shown interest in US fiber by buying Yipes. Yet given the anything-you-can-do-I-can-do-better relationship between the two, Tata can’t be ruled out. Both carriers are looking to challenge the big guys internationally over the next decade and are known to be looking for greater access to the US market. That said, the time doesn’t seem quite right. Probability: Medium
- NTT: The Japanese incumbent NTT Communications (NYSE:NTT, news, filings) already has a US arm (NTT America) which it built out of the Verio assets. They have become increasingly aggressive in the USA lately, even to the extent of sponsoring an ad here on Telecom Ramblings up in the header. But their capacity is all leased in the form of wavelengths, and if they really mean business then Qwest longhaul seems to fit quite well. Like AT&T and Verizon they could buy it out of pocket change, but unlike them they would actually have both an immediate use for the assets themselves and the long term view necessary to appreciate the value of the conduits. Couple that with NTT’s rumored bid for Pacific Crossing and maybe some metro assets down the line and one has the makings of a Japanese telecom invasion. Probability: Medium to High.
If history is any guide, though, this rumor is probably bunk – at best a trial balloon to see what they can get for it. What do readers think? Here’s a poll:
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If your T & VZ you get the cost savings but you also get the lift to industry pricing which probably is just as important.
we can’t forget cable companies like comcast. sprint already has a backbone and maybe they might want to pick up qwest’s network.
Comcast maybe, but Sprint is probably a little too preoccupied right now to take on a new integration.
the fact that Q never sold this when asset prices were multiples of now is just another example of stupidity that marked the top of the market.
Given current market conditions… Qwest might decide to unload the US West assets and keep its long haul network and wholesale business… they would probably end with a pile of cash and become the new “natural consolidator” in Denver… thoughts?
Zayo??
Cavalier?
Assuming the price range in the WSJ of $2-3bn is correct, I don’t think Level 3 can get there. It would need to be a stock deal, and with a mkt cap of only $1.7bn, they would need to sell over 50% of the company which would trigger a change of control in their debt. T and VZ make sense, big question is regulatory. I doubt NTT has the stomach for a large acquisition like this. The Indian carriers have been agressive in the U.S. (eg yipes and INAP) but this would be big for them too. What about BCE or Telus? I suspect there are just as many companies with integrated voice/data needs between canada and the U.S. than with india or japan.
T-Mobile/Deutche Telecom would lower their US landline cost to tie their towers, and pick up the asset they need to compete as AT&T and Verizon start to provide more fully integrated offers. Of course, they have other options. And the cable companies are a natural fit, as none of them have the footprint alone to compete nationally, and all desparately need telecom expertise personnel. But the bigger question is how much debt Qwest would be able to unload along with the deal. It’s not likely Qwest will shed the asset and retain the debt on the LEC side (US West). The point is to shed debt on the LEC, and merge into AT&T or Verizon. $13 B in debt is too high a tag for 4 significant cities.
To the contrary niknak, US West is exactly the type of entity you would want as a highly levered, cash flow and debt pay down story.
Level 3 will buy Qwest. Denver mafia. Level 3’s Genuity backbone runs on Qwest. Easy to integrate. Both on GSA schedule and Networx suppliers. No international carrier will be allowed to buy Qwest for national security concerns so delete all those dumb ideas. AT&T and Verizon don’t want it. TWTC would never get into long haul they view it as a commodity. Cable does not know how to run it. Global Crossing is a mess they don’t want it they want XO to reduce last mile costs. Process of elimination means Level 3. They don’t care if they give away half the company to become worth $20-30BN and get a L-T anchor tenant in Qwest for their network.
Vik,
I have heard the same thing. The additional $60M of capital they raised this afternoon I think lends credence to those whispers.
$60M isn’t enough to make a dent for Q longhaul, they need 30 times that much. Might work for a grab of Velocix though.
Vik, nice to see you poking around here!
Lets think bigger, what about Google purchasing Qwest? This would make them that much more valuable to their share holders. They could call it Gwest.
Or Goost? 🙂 Seriously though, in the past I’ve done my best to shoot down theories of Google buying Level 3, and the same would hold true for Qwest longhaul.
Qwest will not sell anything as it has its sights set on a much broader scale. Keeping the LongHaul and inroads to Qwest’s lucrative business and government contracts. Expanding the Western US broadband backbone, for it’s own network as well as cynergy links for cell towers wireless modification. Scrapping copper as it forgoes the last mile concept and takes fiber to the home for iptv and 40meg availability across its entire network.