Speculation circulated last week that Germany’s Deutsche Telekom AG is in talks with Qwest Communications International Inc. about a possible merger between the two, while SBC Communications Inc. and BellSouth Corp. also were rumored to be in merger talks.
There are signs that the pending merger between Qwest and U S West is in distress, potentially opening the door for Qwest to partner with the European telecom giant.
The Denver Post reported Friday that Qwest chief executive Joe Nacchio seems to be distancing himself from U S West. He noted difficulties in attaining certain state regulatory approvals for the companies’ merger, and emphasized that either company could still walk away from the deal.
Early last week, U S West’s chief executive, Sol Trujillo, announced he would resign upon the completion of the merger, citing differences in opinion over the management and organizational structure of the new company.
U S West reiterated its commitment to the Qwest merger and said it had no comment on speculation about other potential transactions.
DT could acquire U S West and Qwest-both based in Denver-through separate offers, or it could elect to merge only with Qwest, leaving U S West to fend for itself.
DT however, reportedly is encouraging Qwest and U S West to come to an agreement on how to proceed with a potential DT bid, and some analysts also predict DT most likely will try to acquire both companies.
“Qwest and U S West shareholders already have approved the merger between those two companies, thus we believe any bid for Qwest would include U S West,” said Guy Woodlief, telecom analyst with Prudential Securities Inc. “Moreover, from a strategic standpoint, we believe Deutsche Telekom would want U S West’s customer base, including big technology companies in the Seattle and Denver markets.”
A deal with Qwest would give DT a 16,000-mile network of high-speed fiber lines in the United States, as well as a long-distance company. Any interference with the pending Qwest/U S West merger though, could spawn a lawsuit by U S West shareholders, and slap Qwest with a hefty break-up fee-$800 million, according to Nacchio.
A possible acquisition of Qwest by DT also could spark DT’s interest in BellSouth, which bought 10 percent of Qwest last year. BellSouth’s 10 percent now represents $4.4 billion, an increase of more than 100 percent.
BellSouth has been trying to expand its footprint for some time. It lost out to MCI WorldCom Inc. last year in its bid to acquire Sprint Corp., but a deal with SBC would combine SBC’s 11 million customers in the Southwest, Midwest and California with BellSouth’s 5 million customers in the Southeast, ranking it second in terms of customers behind the recently merged wireless assets of Bell Atlantic/Vodafone AirTouch plc.
In its continuing quest to gain more territory, at the very least, some analysts say BellSouth should be maneuvering itself into the thinking of DT, which has been shopping for partners in its bid to extend its global presence.
Complicating the deal further is the fact that BellSouth’s main partner in Europe, Dutch company KPN Telecom, has a joint venture with Qwest called KPNQwest, which is building a fiber optic network across Europe.
Representatives from BellSouth and SBC would neither confirm nor deny the merger reports, saying they “don’t comment on speculation and rumors.”
All the companies’ stock prices reacted strongly to the merger speculation. Qwest’s shares went up more than $12 last Wednesday to close at $58. At RCR press time the stock was at $63.62, up $3.62 from the previous day’s close.
U S West shares increased nearly $7 to close at $79 last Wednesday on the news, then dropped to $72 the following day. Its stock was trading at $75 at RCR press time.
Since the news broke, DT’s American Depository shares have gone up more than $11. DT shares were trading at $99.75 midday Friday.
SBC’s and BellSouth’s shares have both increased about $3 since the news of their possible merger, trading Friday at $45.56 and $46.25, respectively.
