Merger Suitor Hangs Up on Qwest
By Cindy Christ

Qwest Communications said late Thursday that merger talks with a "major telecommunications company" ended after US West, the Baby Bell currently being acquired by Qwest, threw a wrench in the deal.

Although Qwest didn't identify the company, the media widely reported that German phone giant Deutsche Telekom AG was the likely suitor.

"We regret that US West apparently wouldn't even consider an alternative transaction involving a major telecommunications company and Qwest despite the possibility of greater value for US West shareholders," said Joseph Nacchio, Qwest chairman and CEO, in a statement.

According to news reports, US West insisted that its shareholders get the same terms they would have received under the Qwest deal. Also, some major investors were said to oppose owning stock in a foreign company.

Under Qwest's pact with US West, shareowners would receive 1.73 shares of Qwest stock for each US West share, or about $103.80 based on Qwest trading at $60.

Rumors of the Deutsche Telekom bid had driven Qwest shares sharply higher recently. In an interview with CNBC financial television, Nacchio said the exchange ratio first discussed with US West was equal to $69 to $80 per share and that Deutsche Telekom's offer was "in the $90s."

Nacchio told CNBC that US West flatly rejected the offer "based on the bizarre notion that the exchange ratio is more important than the total value" of the deal.

Shares in both firms sank on the news Friday, with Qwest (Q) closing down $6.63, or 11 percent, at $53.38. US West (USW) slid $6.13, or 8 percent, to $70.38.

Shares in Deutsche Telekom (DT) finished higher, up $2.38, or 2.6 percent, at $95.44.

On Friday, the Federal Communications Commission approved the $50 billion merger between Qwest and US West, as long as Qwest gives up long distance customers in 12 states in US West's 14- state home territory.

Seven state regulators in US West's operating region also must approve the merger, which is expected to close late this year.

Last Sunday, the relationship between Qwest and its partner turned bitter when US West reported it wasn't informed of the merger talks with the unnamed company. The local phone service provider also threatened to sue Qwest for more than the $800 million breakup fee negotiated if one sought to exit the deal.

Qwest later reaffirmed its commitment to the US West merger, but some challenged its sincerity after Nacchio questioned whether the deal would gain regulatory approval.

Sources close to talks between Qwest and Deutsche Telekom said DT may have been put off by having to pay up to buy both companies, and was reluctant to enter the U.S. regulatory labyrinth and complex local phone system.

The disconnect marks another failed attempt by Deutsche Telekom to expand its business internationally. Previous merger deals with France Telecom and Telecom Italia also proved unfruitful.

The firm is under pressure to link up outside its home market, where it derives most of its sales, before losing state protection in June when the German government divests its controlling stake in the company.

Analysts say Deutsche Telekom's interest in Qwest was targeted at the carrier's state-of-the-art fiber optic network capable of carrying high-speed Internet and data traffic.

Qwest and US West, both based in Denver, entered a merger agreement last July after Qwest broke up a previous engagement between US West and Global Crossing (GBLX) in a hostile takeover bid.

Bermuda-based Global Crossing is building a global, land-based and undersea fiber optic communications network.

Despite the acrimony, Qwest said it would honor its commitment to US West.

"We are going to perform our obligation under that agreement and we expect U S West to do nothing but the same," Nacchio said at a Credit Suisse First Boston conference, according to CNBC.

Deutsche Telekom was reported to have already moved on to its next conquest Friday, and was said to be looking at international broadband operators Global Crossing, Cable & Wireless (CWP) and Equant NV (ENT) and U.S.-based NextLink Communications (NXLK).