An unspecified number of U S West shareholders filed a lawsuit against Qwest Communications International Inc. March 17, alleging Qwest deflated U S West stock prices through its recent merger negotiations with Deutsche Telekom AG, which are now defunct.
The suit, filed in U.S. District Court in Delaware on behalf of the U S West shareholders by New York law firm Milberg Weiss Bershad Hynes & Lerach, named Qwest and its chief executive officer, Joseph Naccio.
A statement released by the law firm claims U S West stock was trading at a discount of more than $20 per share upon the news that Qwest was negotiating with Deutsche Telekom. Prior to those talks, U S West stock was trading at a discount of between $6 and $7 per share.
This discount was particularly harmful to “risk arbitragers,” which are investors who buy shares in a company that is being taken over while selling short shares of the acquiring company, the law firm said.
Following the announcement several months ago of the Qwest/U S West merger, the arbitragers purchased U S West stock and shorted Qwest stock, seeking to capitalize on the 10-percent “spread” on the deal, which indicated the consummation was not very risky.
“However, when news of Naccio’s negotiations with Deutsche Telekom became public, and Qwest’s stock price rose while U S West’s stock price dropped, the spread on the deal widened enormously and many arbitragers were forced to liquidate their positions and suffered enormous financial damages,” the law firm said.
On March 1, the day the Qwest/Deutsche Telekom negotiations were revealed, U S West’s stock closed at $79 per share. Since then, U S West stock has dipped as low as $66.25. It was trading at $68.50 at RCR press time.
Qwest’s stock closed at $46.25 on Feb. 29, jumped to $58 the next day, and traded as high as $64 on March 3. Qwest shares were trading at $48.06 at RCR press time.
The lawsuit trails weeks of strained talks between Qwest’s Naccio and U S West Chief Executive Officer Sol Trujillo, who is planning to exit the company once the Qwest/U S West merger is complete.
Naccio told The Denver Rocky Mountain News last week that Qwest brought U S West into discussions as soon as there was something to bring them in on.
“The third party approached us. As soon as we had something, we delivered it [to U S West]. Twenty-four hours later, it was rejected. It was rejected on conditions that were never acceptable. I don’t want to speak about motives. That person is gone. The deal is dead,” Naccio said.
Despite the tumultuous nature of the Qwest/U S West deal, Trujillo told attendees of Merrill Lynch & Co. Inc.’s Global Telecom Investors Conference on March 15, the merger deal is airtight.
“Whatever happens, I will make sure Qwest lives up to it. We will hold Qwest accountable for anything that gets in the way,” Trujillo said.
The same day the lawsuit was filed, the Qwest/U S West merger moved one step closer to completion, obtaining regulatory approval in Iowa. Approval still needs to be granted in six more states in order to be consummated. Both Qwest and U S West have predicted the deal could close by late summer or early fall.
