Qwest: New CEO to determine scope of deal-making activity, bankers speculate – Notebaert ranks areas of potential interest15 June 2007

Qwest, a NYSE-listed regional Bell operating company (RBOC), may generate lots of deal-making opportunities depending on who replaces CEO Richard Notebaert, speculated two sector bankers. Although neither knew who Qwest might approach for the CEO spot, both noted that the Colorado-based telecom has, for some time, needed to improve its competitive position, and an experienced deal-maker could relieve some strategic shortfalls through M&A.
Meanwhile, in an interview, Notebaert pointed out that he, former CEO of Tellabs and president of Ameritech Mobile, has overseen more than USD 100bn in merger activity during his 30-year career, and even now envisions the direction Qwest may follow after his retirement.
Notebaert confirmed speculation that Qwest would derive the most “synergies” if it acquired a long distance carrier. According to one of the bankers, Sprint Nextel in Virginia sports the only true long distance network, with robust wireline connections, whereas others often mentioned targets, such as Level 3 Communications and Time Warner Telecom, are wholesale and voice-over-Internet-protocol providers.
However, Sprint has not appeared willing to sell, the banker said. In previous report by this news service, a Sprint spokesperson said the wireless provider considered long-distance core to the company’s operations. Sprint wants to keep it, the spokesperson said, to handle anticipated growth in data communications. For full-year 2006, Sprint recorded long distance operating income of USD 439m on revenue of 3.9bn, down from operating income of USD 493m on revenue of USD 4.2bn the prior year.
Since the heightened merger activity among RBOCs in the last three years, Qwest has witnessed its competition, which had previously operated as regional entities, acquire long distance businesses. SBC in Texas acquired AT&T, giving it a long-haul business and its famous name. Verizon in New York acquired MCI. BellSouth in Georgia merged with AT&T, making the combined entity the largest telecom in the US.
Qwest remains the sole RBOC without a long distance business. Bankers have speculated that, for that same reason, Verizon could purchase Qwest, giving the New York RBOC greater heft to compete with AT&T.
Notebaert said the second most strategic area of potential M&A is through the purchase of a hosted managed services provider. He declined to name attractive targets but explained, “We could derive tremendous synergies by replacing their networks with ours.” Hosting and managed services refers to connection and management capabilities over a telecom network, and Thomas Watts, an analyst at Cowen & Co, recently called Savvis in Missouri the premiere asset on the market. Savvis’ market capitalizatation is USD 2.6bn.
Appearing to dispel recent speculation that Sprint might acquire rural local exchange carrier (RLEC) Embarq in Kansas, Notebaert called a merger with an RLEC one of the “least synergistic” deals it could make unless the smaller telecom has an adjacent, rather than overlapping, network to Sprint’s. “An RLEC’s only advantage is cost cutting,” he said.
Last of all in terms of strategy, Notebaert maintained, it could acquire a systems integrator. Although too large a swallow for Qwest, some of the best known systems integrators are IBM in New York and Accenture in Bermuda, and they offer services that store, process, maintain and manage data. Notebaert said Qwest would gain only one thing through such an acquisition – revenue.
On Monday, Qwest announced Notebaert’s intention to retire upon finding a replacement. Notebaert said he intended to become more involved in non-profit organizations. Both bankers said Notebaert had performed exceptionally well, quadrupling the value of the company’s stock during his seven-year tenure.

by Sarah Cohen

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