Qwest, LCI Plan Merger Valued at $4.4 Billion
A new wave of consolidation swept the fast-growing telephone industry Monday as two companies proposed a big merger and three others announced a global alliance.
Creating the nation’s fourth-largest long-distance phone company, Denver-based Qwest Communications International Inc. said it would buy LCI International Inc. of McLean, Va., in a $4.4-billion all-stock deal.
Meanwhile, Spain’s Telefonica de Espana announced a global partnership with long-distance giant MCI Communications and WorldCom Inc. aimed at leveraging the three companies’ communications networks in Europe as well as North and South America.
The two deals illustrate how competition in the telecommunications industry is driving even one-time antagonists to combine in order to acquire larger economies of scale.
Qwest and LCI have squared off against each other over the billions of dollars in telephone access fees that long-distance carriers like LCI must pay to Qwest and other local carriers to terminate toll calls. Similarly, MCI’s global partnership with Telefonica and British Telecom became strained last year after Worldcom beat BT in a bitter bidding war for MCI with a $37-billion offer.
“The whole telecom terrain is so risky now that if you stay in small individual markets you won’t survive,” said David J. Roddy, chief telecommunications economist for Deloitte & Touche Consulting Group.
Roddy said Qwest was “a company with next-generation technology [in] need of plain, old-fashioned customer service, billing and marketing,” and that Telefonica gives Worldcom and MCI a leading position in the fast-growing Latin American telephone market.
While most consumers have yet to enjoy much benefit from the telephone merger mania, many large businesses are seeing two or more local carriers vying for their traffic for the first time in more than half a century.
The phone deals have also driven the cost of long-distance dialing to under eight cents a minute and provided a slew of new services such as Internet fax and telephone service.
“Consumers are seeing some increased competition in long distance and wireless, but the big benefits are going to business customers,” said Sheldon Laube, chief technology officer for USWeb Corp., a technology consulting firm in Santa Clara, Calif. “These sorts of mergers are giving carriers the ability to offer a much broader range of services.”
The combination of Qwest and LCI would create a telecommunications giant with about 2.3 million customers, yearly sales of $2.3 billion and a 3,600-mile, state-of-the-art, fiber-optic network between Los Angeles and Columbus, Ohio. An additional 16,285 miles of fiber will soon connect 125 more U.S. cities in the next 18 months.
Besides high-capacity fiber-optic cable, the deal would also bring Qwest a veteran sales force, long-distance traffic and access to LCI’s billing systems. Freed of having to create such operations from scratch, Qwest President Joseph P. Nacchio estimated the merger would result in annual savings of $300 million.
LCI shareholders will receive $42 in Qwest common stock in exchange for each share of LCI. If the average stock price of Qwest drops under $26.95, LCI may terminate the transaction unless Qwest adjusts the stock swap ratio. The deal is subject to regulatory review and approval by shareholders.
LCI and Qwest said they expect to complete the merger by the third quarter of 1998. LCI shares surged $3.31 to $37.69 on the New York Stock Exchange. Qwest shares fell 50 cents to $36 on Nasdaq.
Meanwhile, WorldCom and MCI--which are awaiting merger approval from regulators--continued their efforts to dominate the telecom landscape by partnering with Spain’s leading telecommunications group, Telefonica.
“In these two companies the pioneer spirit is still alive,” Telefonica Chairman Juan Villalonga said in a Washington news conference, referring to Worldcom and MCI.
Telefonica faces increased competition as the European telephone market undergoes deregulation this year. Officials of the three companies said they hoped to launch a broad range of new business ventures aimed at delivering seamless global telecommunications services for business.
WorldCom shares rose 25 cents to close at $38.50. MCI shares fell 19 cents to close at $47.31. Both trade on Nasdaq.
