Qwest: An attractive tier 2 ILEC acquisition target?

With many of the existing tier 2 ILECs looking to grow their respective businesses through mergers/acquisitions, a UBS report argues that Qwest could be a prime acquisition prospect. Wall Street liked the idea enough as Qwest's shares rose about 5 percent.

What makes Qwest a good target is the ILEC's steady cash flow and growing revenues. UBS analyst John Hodulik in a research note said that the one growth area for Qwest, will be in the business services market.

During the third quarter of 2009, Qwest's business market revenue [1], while slightly down from 2008, but up 1 percent sequentially. Contributing to its sequential growth was IP services, which drove its strategic revenues up 11 percent. And while its wholesale business hasn't traditionally performed well, the service provider has committed to building [2] out more fiber to cell sites in its 14-state region for wireless backhaul.

Consolidation of the tier two ILEC market is being brought on by one common business factor: decreasing landline voice revenues being lost at the hands of cable and wireless. Tier 2 service providers such as Windstream [3], CenturyLink [4], and Frontier [5] are finding that expanding through M&A is their best option to increase revenues.

"Despite its much larger size, we believe Qwest could become a takeover candidate for one of the rural local exchange carriers (CenturyLink or Windstream) looking to gain scale," Hodulik wrote.

For more:
- Reuters has this article [6]

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[1]Qwest mulls its video options [8]
Qwest: Net income up, but operating revenue declines
[9]Qwest lights fiber-based mobile backhaul future
[2]Qwest: Conservative, but aggressive - Fiber to the X [10]