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Carrier Services
Will Qwest shed its long-haul network?
Potential sale could allow company to get in touch with local roots
by Sean Buckley
For Qwest Communications, the saying "you can always go home again" may come true amidst rumors that the Denver-based RBOC might return to doing what it knows best: being a local telephone company.
According to a Wall Street Journal report, a potential sale of Qwest’s long haul network could fetch the Denver-based telco between US$2 billion to $3 billion.
There are a number of factors that make this rumor even more plausible.
One obvious issue is the company’s financial strain. Not only is the RBOC saddled with $14 billion in debt, but Q4 08 profit fell by 50 percent. What’s more, Q1 09 revenues are not looking any better as it expects revenue to be lower than analyst estimates.
Selling off the long haul network would help the company pay down some of its debt.
A potential sale won’t be without its challenges. Obviously, the current economy is not the best time for other carriers to raise funds to make acquisitions. But even if they do find a buyer, some analysts believe that the proposed price is unrealistic.
“I don’t think they’re going get nearly as much as being advertised, and it’s going to be tough to sell,” said Mark Lutkowitz, principal of Telecom Pragmatics. “It seems like they have made up their mind to get rid of it and it’s in their best interest.”
Qwest, a startup long-haul carrier, has seen its fair share of drama since it acquired the former US West in 2000.
After Qwest extended its hand to buy US West in late 1999 — an offer that was turned away quickly by US West officials — Qwest launched a hostile takeover bid and acquired the company. While the long-haul network gives them national presence, Qwest has been a mid-tier market player outside of its 14-state footprint.
Realizing that they may be better off as a local provider, the reality is that Qwest lacks the capabilities of AT&T and Verizon.
“They can’t compete on the same level with the other two RBOCs — not even close,” Lutkowitz said. “On the long-haul side, especially wholesale, Level 3 has the lowest-cost network so they have an advantage there. Qwest has really morphed into an independent company with some big cities and a lot of rural areas.”
Sizing up potential bidders
The question is who will be willing to shell out the cash for Qwest’s long-haul network? The network, which brought Qwest $3.27 billion in sales in 2008, has been a major contributor to Qwest’s success in serving larger enterprise and government customers.
Of course, there are the usual suspect carriers that could make a bid.
The most obvious buyers would be fellow RBOC competitors AT&T and Verizon. Already possessing their own respective ULH networks, one of them could purchase Qwest’s assets, which include two national fiber conduits, as an insurance policy for future network needs.
However, the possibility of a Democrat-led FCC would likely block an inter-RBOC deal.
“The other two RBOCs might just want to put out a trial balloon to see whether they could get away with buying the Qwest long-haul network and shut it down,” Lutkowitz said. “I suspect the new the new FCC would not allow that to happen because their kneejerk reaction will be ‘this is anticompetitive.’”
Beyond AT&T and Verizon, there’s Level 3 Communications. Speculation of a possible Level 3 purchase was exacerbated when the wholesale carrier secured an additional $200 million in funding. However, such an outcome is unlikely. Not only is the funding far below what would be required to make this purchase, but it was also garnered for operational use.
Although Level 3 has been trying to raise cash of late and has been a consolidator itself, gathering the right funds to make such a deal work might not be worth the risk.
“Level 3 could do it, but I can’t see them putting up the money for that and getting further into debt at this point,” Lutkowitz said. Their last experience integrating Broadwing wasn’t so hot.”
But the U.S. carriers represent just some of many possible suitors.
Other industry prognosticators believe Qwest’s assets could also be attractive to international service providers trying to increase their U.S. foothold.
Instead of having to work with other carrier partners to get off-net connectivity, they would have a long-haul network to meet the needs of multinational clients that have facilities throughout the United States and want to work with one primary partner.
Rob Powell, founder of weblog Telecom Ramblings, believes that while European carrier acquisitions aren’t out of the question, a more likely scenario come from Asia such as Reliance Globalcom or Tata.
A potential Reliance-Qwest long-haul marriage is not completely far fetched. Already, Reliance has established an American presence through its acquisition of Yipes last year and owns the FLAG submarine cabling network.
Reliance’s acquisition of Yipes enabled the Indian conglomerate to extend its sizeable international footprint with enhanced metro Ethernet capabilities in the U.S. market. (see Goodbye Yipes, hello Reliance Globalcom!).
“Both carriers are looking to challenge the big guys internationally over the next decade and are known to be looking for greater access to the U.S. market,” explained Powell. “That said, the time doesn’t seem quite right.”
Along with Tata and Reliance, the other dark horse in the potential race to buy Qwest’s long haul network could be NTT Americas.
NTT has a number of things going for itself in the U.S. The operator has established a U.S. foothold via its NTT Americas subsidiary through its acquisition of Verio.
“Like AT&T and Verizon they could buy it out of pocket change, but unlike them they would actually have both an immediate use for the assets themselves and the long-term view necessary to appreciate the value of the conduits,” argued Powell. “Couple that with NTT’s rumored bid to purchase Pacific Crossing and one has the makings of a Japanese telecom invasion.”
However compelling the possibility of an international carrier buying Qwest’s assets could be, the one stumbling block could be Qwest’s involvement in the government’s multibillion dollar GSA Networx contract.
Under the Networx contract, Qwest has won task orders from large government agencies including, notably, the Department of Veterans Affairs, to build out an MPLS network. Government security issues would likely prevent a foreign carrier taking over the management of these networks.
An independent identity
While selling off its long-haul network would take Qwest out of the long haul networking business it would allow them to refocus their efforts on the local market.
Even if Qwest does return to its local roots, it still faces a number of challenges. Like other traditional phone companies, Qwest continues to see erosion of its bread-and-butter voice business to cable competition and wireless substitution.
The operator has been able to offset some of its ongoing line loss through the addition of 54,000 new broadband customers in Q4 08. Qwest’s CEO Edward Mueller said during the Citibank 19th Annual Global Entertainment Media and Telecommunications Conference in January that in Q308, Qwest added 61,000 subscribers with about 40,000 of those subscribers buying new higher speed FTTN-based services. (see href="/article.asp?HH_ID=AR_4709">Qwest takes a disciplined operating approach).
Where there's a problem, there's an opportunity. By refocusing its energies as an independent company with RBOC assets, Qwest could possibly find ways to extend its capabilities into markets that have been left behind by AT&T and Verizon — markets that they felt were too small for them to serve.
Out of region, Qwest could also act as a competitive provider for business services.
Evidence of Verizon’s and AT&T’s exodus from secondary markets has continued to accelerate in recent years. Likewise, Qwest could sell off less attractive lines as well.
The most striking example was Verizon selling off assets throughout parts of Maine, New Hampshire, and Vermont to Charlotte, N.C.-based independent telco FairPoint last year. (see FairPoint: New England network transition is on target).
In addition to acquiring unwanted lines from Verizon and AT&T, Qwest has the opportunity to become a Tier 2 telco market consolidator.
“It’s better to be number one in this growing independent market than try to be the third weakest player as an RBOC,” he said. “By definition overnight, if they do consolidate the independent telco companies they will become like the old GTE was when they owned 55 percent of the independent lines.”
Obviously, the unkind economy has not been the greatest time for making deals, but the independent telco market, much like the CLEC and RBOC markets, is ripe for consolidation.
Late last year, Tier 2 telcos EMBARQ and CenturyTel decided to merge in a multi-billion stock deal. (see href="/article.asp?HH_ID=AR_4651"> EMBARQ toes the line).
Lutkowitz believes that the EMBARQ/CenturyTel marriage is a sign of things to come.
“It’s a natural occurrence that has happened across the board with CLECs and then RBOCs, so it’s inevitable that it will happen with the independent telephone companies,” he said. “This is the first of many mergers going forward, and if the economy was better we probably would have seen a few more by now.”
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