Business News – Qwest Makes Play for US WEST, Frontier

Posted: 07/1999

Qwest Makes Play for US WEST, Frontier
By Liz Montalbano

In what could prove to be the shot that fires off this summer’s down-and-dirtiest
mergers and acquisitions (M&A) wrestling match, Denver-based Qwest Communications
International Inc. has made an offer to acquire both Denver-based regional Bell operating
company (RBOC) US WEST Inc. and Rochester, N.Y.-based Frontier Corp.

The deal is proposed in separate transactions for a total of $55 billion in cash and
equity and $11.4 billion in assumed debt.

The move is a direct counteraction to two recent announcements–the former in March,
the latter in May–that Hamilton, Bermuda-based Global Crossing Ltd. would acquire
Frontier in an $11.2 billion deal, and merge with US WEST in a stock-swap deal valued at
$37 billion.

"It’s like McDonalds letting Burger King scope out the best locations, then
outbidding them at the last minute," says Jeffrey Kagan, an Atlanta-based telecom
industry analyst, of the deal.

This sets the stage for a standoff between the Hatfields and the McCoys, and the fight
may be just as personal–and deeply rooted. That’s because both companies’ CEOs, Joseph P.
Nacchio of Qwest and Bob Annunziata of Global Crossing, are battle-scarred AT&T Corp.
veterans. It could be there’s an old score to settle.

"The Nacchio/Annuziata battle will be fought on two levels–at the corporate level
and at the ego level," Kagan says. "Their new companies need the revenues,
customers and traffic, and they have staked their reputations so it’s personal."

On the other hand, Jonathan B. Haller, director, Internet and network services analysis
for Sterling, Va.-based Current Analysis Inc., sees the move not as a clash of the Titans,
but as pure defense. He thinks Qwest is "spooked" by "Global Crossing’s
potential to make a local/national/international play with US WEST, Frontier and its
global terrestrial and undersea networks."

Whatever the case, both sides are digging in for the long haul. But is the prize really
worth the fight?

Why the companies would want Frontier is a no-brainer. It’s got competitive local
exchange carrier (CLEC) status in 29 states and incumbent LEC (ILEC) status in 13, and
it’s a long distance provider to boot. "Frontier would augment their (Qwest’s)
network and give them more sales channels," Haller says. "I think of Frontier as
a mini-Qwest."

Too bad he doesn’t think that highly of US WEST. "Funny that they’re fighting over
such a dirty, bargain-basement rag as US WEST," he says bluntly. "US WEST has a
vulnerable local position. It has no wireless market share, no international holdings, a
very small data-services division, a reputation for poor customer service and a
monopolistic and bureaucratic culture. If that’s not enough, it also has a predominance of
rural holdings."

What it does have as a major selling point, he concedes, is revenue. Lots of it–$4
billion in "free cash flow" a year, to be more specific. Haller thinks Qwest
wants to use this money to fund its plethora of other projects, including network
buildout, Internet services and applications services. Take that, along with 16 million
customers in an extremely uncompetitive marketplace, and bagging US WEST looks like a
pretty sweet deal.

But even if Qwest successfully snatches US WEST from under Global Crossing’s nose,
which, to the dismay of investors (Qwest stock dropped 25 percent at the announcement), it
will, there are regulatory issues to consider. If Qwest isn’t still smarting from the
Federal Communications Commission’s (FCC’s) nixing (and an appeals court’s subsequent
upholding of the FCC’s ruling) of last year’s proposed marketing deal with the ILEC, which
would’ve allowed US WEST to offer long distance services to local customers without having
to open local markets, they should be. The money might be good, but Qwest still won’t be
able to offer long distance service in US WEST territory–at least for now.

Only time will tell who’ll end up with the most cake after the dust settles, but it all
makes for a the start of a sizzling summer. And don’t expect this fight to be the last
between Qwest and Global Crossing.

"Mark my words," Kagan says. "This will be the first of many
Nacchio/Annunziata battles over the next few months and years. Then maybe they will decide
to join forces themselves.

"Then the big question is," he adds, "is there enough room at the top
for all that ego?"