US telecoms start-up Qwest Communications International Inc has made its play to become a major player in the US market with a $4.4bn all stock deal to acquire LCI International Inc, the fifth largest long distance company in the US. The deal rockets Qwest, which has so far concentrated on building out its planned North American fiber network, into the long distance market. The combined companies had 1997 revenues of $2.3bn but only $696.7 of it came from Qwest operations. Qwest, which only launched its IPO in June last year (CI No 3,190) is using its booming stock price to finance the deal. It has seen its stock rise 231% since the IPO, to a closing price of $36.50 on Friday from $22 at IPO. The stock was split two for one split in February. Qwest says the deal wins it three years’ worth of organic growth. So far Qwest has less than 2% of the total US long distance market with the company concentrating on building out its multimedia fiber optic network across the US and Mexico.
The companies say the deal will bring $300m in savings the first year after the acquisition closes. Those savings are expected to rise to $1bn in the period 1998 through 2001. The saving will come from sharing network resources and sales operations. The deal gets Qwest the remaining telecoms infrastructure it would have to have built out including LCI’s established sales and marketing operations, distribution channels, intelligent network platform, and customer care and billing system. LCI, which hires bandwidth for the majority of its offerings, will get to add the Qwest network to its recent moves to develop its own network. According to the company it will save it two to three years in its effort to develop a data network and data services. Qwest’s 16,285 mile network will serve more than 125 cities and is due to be completed in the second quarter of 1999. Currently, more than 3,600 miles are activated. For its part, LCI has 4,500 mile fiber-optic network which it plans to extend to 8,500 miles by the end of the year. Under a definitive agreement, each LCI share will be converted into $42 of Qwest common stock. Based on the closing prices of Qwest and LCI on March 6, LCI shareholders will receive about 122.4 million Qwest shares, or 36.4% of the stock of the combined companies. If Qwest’s average stock price prior to the deal’s closing is less than $26.95, LCI may call off the transaction unless Qwest agrees to adjust the stock-swap ratio. LCI which has long-distance service in 40 US markets and commercial local service in 30 US markets, will receive two seats on Qwest’s board of directors. The deal which is expected to be completed in the third quarter depending upon shareholder backing and regulatory approval. The board of directors of each company has approved the merger. LCI closed up $3.3125 at $37.6875 while Qwest was down $0.5 at $36.
