The Qwest conundrum

Word on the street (Well, the Wall Street Journal) is Qwest wants to sell off its long-haul network.  Say what?

There are two questions the WSJ story raises: Why and how? 

First, why? A financial analyst tracking Qwest thinks a sale is unlikely and the ideas is being floated to figure out if anyone is interested before going back to the debt market, but I find that a bit hard to believe because Qwest already has $14 billion in debt. Qwest says it's situation is manageable, with $575 million in cash and enough cash flow to pay down debt.

If Qwest is seriously shopping around its long-haul network, it must be in serious trouble, because once the network is sold, the company becomes nothing more than a regional phone company with a wireline base of 11.6 million phone customers that declines every quarter. Selling off its long-haul network would also raise questions on its federal telecommunications contracts. 

So, why becomes either: a) The story is true, and Qwest wants to make a move before its finances get worse or b) The story is false because someone (Qwest on debt, shareholders on stock price) think there's a financial advantage to be gained.

Assuming that the story is true, how morphs into "Who?" AT&T could be a player, but there are suggestions it is too bruised from the last regulatory go-round when it bought Bell South.  Verizon might be similarly reluctant, given it just finished buying Alltel Wireless. But if Verizon really wants to buy, I have no doubt Verizon will make it happen. 

To complicate matters further for either AT&T or Verizon, the Federal Communications Commission (FCC) is changing leadership, and nobody has a firm read on what would happen under new management. Indications are that it might be biased against a consolidation of long-haul networks. 

Level 3 and TW Telecom, while listed among the usual suspects, have too much debt, and Qwest is looking for an all-cash deal. 

Having ruled out all the usual suspects, let's look at three unusual suspects. A cable company without heavy debt or a consortium of cable companies might be an interesting option/opportunity, but cable has put a lot of money into Clearwire. Still, purchasing a long-haul carrier could translate into savings down the road - and capacity to sell to businesses. It's not likely, but worth considering.

An off-shore purchaser would be a potential, but risky option. Having partial foreign ownership of Qwest's long-haul network would make a lot of people uncomfortable, no one knows what the FCC would think, and there's all that federal government business. Still, if Qwest needed the money, it might happen.

Finally, there's everyone's favorite technology sugar daddy: Google.

And it might be the most likely purchaser for three good reasons. 1) At the end of 2008, The Goog had nearly $16 billion sitting around in cash and equivalents. It could pay $2 billion and not bat an eyelid.  2) Google is a massive consumer of long-haul data services. Owning its own long-haul pipes would provide it with both cost savings and a better negotiating position when it sat down across from other carriers. 3) Google Voice has already put the company into the (voice) communications business already. It's not that far of a stretch to get into long-haul.

- Doug

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