Buyer, meet seller: Price match eludes Qwest in LD sale attempt

Like a house that sits on the market because the seller's expectations exceed buyers' willingness to pay, the Qwest long distance business has come off the sale block due to the lack of a price match.

Qwest announced yesterday that it had completed a "strategic review" of its LD business in response to "unsolicited indications of interest" in a purchase. Not having announced this review before, this obviously was an acknowledgement that the business was indeed for sale at a price. But that price was never reached, and Qwest decided to pull back and keep the business for now.

The reasons for the lack of a price match are much as we teed up here. The key prospect for buying Qwest's LD network was undoubtedly Level 3 (whether or not it had completed a formal offer, which is not clear). Level 3 is a national company with some current enterprise business -- and greater enterprise aspirations -- but one without an incumbent local unit to fall back on the way Qwest can.

Imagining a discussion between Qwest and Level 3 puts one very much in mind of today's real estate market. Both parties are heavily encumbered by debt, and that puts a fence around what they either could do or needed to have happen.

Level 3 would have had to pay a price modest enough to result in immediately "accretive" cash flow if it hoped to get additional financing. That price would have been constrained by two additional facts: 1) Enterprise LD is still in deflationary mode, and for a "next-generation" carrier, Qwest's interexchange business was always surprisingly heavy in classic long distance toll voice; 2) Qwest obviously doesn't have the presence in truly major accounts that AT&T and Verizon do, and in many cases, not even the legacy presence of Sprint.

For its part, Qwest needed to make sure the sale price would make a big dent in its $13 billion debt pile. Press reports indicate that price discussions never got seriously north of $1 billion. This is not the first asset sale that Qwest or other legacy "RBOCs" have conducted, and when you consider that in some past cases, the rights to their telephone directories -- I'm talking the yellow pages here, for crying out loud -- have gone for more than half a billion, then about a billion for the whole LD business is, from a seller's perspective, a crushing disappointment.

Qwest's original identity was in this very network, and if it were to be unloaded for a mere fraction of its debt load, it would be left in an untenable position. The legacy local business is, of course, financially rewarding for the control of dedicated access lines it provides in the Western states. But the actual use of the legacy local telephony business, especially by younger consumers, is declining as fast or faster in the Qwest territory as elsewhere.

AT&T or Verizon could also, theoretically, look to pick up the Qwest asset. But in our judgment they wouldn't be willing to pay much of anything due to the antitrust headaches such a deal would bring on, which is just as well, as LB3's Hank Levine explained here.

We still expect to see foreign buyers scratch at the U.S. enterprise business. But one can easily imagine that a European or Asian carrier might find a play for the No. 4 carrier in the U.S. to be a waste of time when the No. 3 player -- Sprint -- may have something (or everything) for sale in the not-too-distant future. As before, we continue to watch for developments, as U.S. telecom industry restructuring activity behind the twin towers of AT&T and Verizon remains very much in the cards.