Image: Qwest tower
Ed Andrieski  /  AP file
Qwest is again confronting choices of make an acquisition, be bought or face competitors alone. The company has been "spectacularly unsuccessful" in acquisitions, one executive says.
updated 3/8/2006 7:03:19 PM ET 2006-03-09T00:03:19

Sidelined in the merger game since its failed bid for MCI a year ago, the smallest of the Baby Bell phone companies is again confronting questions about whether it needs to make an acquisition, be acquired or risk standing alone in a fast-consolidating industry.

Analysts say Qwest Communications International Inc., with a territory stretching across 14 Midwestern and Western states, needs to bolster its national network while competing with new rivals invading its local turf — a challenge complicated by AT&T Inc.’s $67 billion buyout of BellSouth Corp.

Having steadied its revenue only recently, now Qwest must grapple with a merger that may force it to replace the long-haul traffic its network carries for BellSouth, business that will likely shift to AT&T’s national backbone.

The Denver-based company remains open to potential acquisitions as long as they make sense and help fill its fiber-optic network, Chief Financial Officer Oren Shaffer told analysts at an investors conference this week.

“We’ve looked at (acquisitions) all along. The only thing I can say here is of all of those strategies, it’s the one that we’ve probably been the most spectacularly unsuccessful at,” he said.

“I think we’ve done what we need to do to create a valuable company,” he said. “If one were trying to position themselves to make sure they were still in the game, if you will, as the industry consolidates, you would do just that.”

Qwest executives declined additional comment.

Curiosity about Qwest’s future was raised after AT&T announced Monday it was buying BellSouth, a deal that unites the two of the nation’s three largest local phone companies and the ownership of Cingular Wireless LLC. San Antonio-based AT&T was created late last year when SBC Communications Inc. bought AT&T Corp.

In January, Verizon Communications Inc. completed its $8.5 billion purchase of Ashburn, Va.-based MCI Inc. some eight months after it won a very public, nasty bidding war against Qwest.

At that time, Qwest CEO Dick Notebaert said the company would take its time and look for potential acquisitions as long as the assets fit its strategy.

Like most players in the telecommunications field, Qwest faces increasing competition from cellular and Internet-based calling as it tries to find new revenue. It is grappling with $15 billion in debt and a shrinking base of landline customers. It lacks a wireless network, although it resells cell phone service from Sprint Nextel Corp.

Qwest has begun offering its own television and voice over Internet Protocol (VoIP) phone services in some cities, and resells satellite cable TV through a package deal.

Though it lost money for the final months of 2005, the results beat Wall Street estimates, and Notebaert has reiterated his hope that Qwest could return to profitability this fiscal year. The company last posted a quarterly profit in the January-March period of 2005, when results were buoyed by the sale of wireless assets. The last time Qwest posted an annual profit was in 2003, largely due to the sale of its telephone directory business.

Analysts have mixed opinions about Qwest’s fate. Some believe it could pick up business to replace the BellSouth traffic.

Others, like Banc of America Securities analyst David Barden, believe Qwest will become an acquisition target because of its traditional phone and long-distance assets.

Janco Partners telecommunications analyst Donna Jaegers believes the company needs to fend off competitors as more cable companies and others begin offering telephone services.

“They got left on the sidelines because they serve just wireline customers and the competition for wireline customers is increasing because of the battle between cable and telephone companies and voice over IP players,” she said. “I don’t know that anybody really wants to step up to buy them until they prove they can really hold their market share.”

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