BellSouth Signals It May Acquire or Raise Stake in Upstart Qwest

Talk that BellSouth Corp. may acquire or increase its stake in Qwest Communications International Inc. heightens pressure on the Denver-based phone company to remain innovative in the rapidly evolving telecommunications world.

Atlanta-based BellSouth, which last month paid $3.5 billion for a 10% stake in the long-distance carrier, said Wednesday that it is considering buying or taking a controlling interest in the company. BellSouth, one of the local phone companies created in the breakup of AT&T; Corp., serves nine Southeastern states.

While some believe such action by BellSouth is premature, analysts nonetheless say it makes sense for Qwest to pair up with a regional phone company. That’s because Qwest is one of the nation’s largest long-distance carriers and operates a fiber-optic network built to carry data and voice traffic at sharply lower costs than the old-style networks that still dominate the U.S. phone business.

Qwest’s nearly complete system uses Internet-style technology to package and carry bits of data and voice. The network will eventually include 18,500 route miles of fiber optics serving more than 130 U.S. cities.

“Qwest is building what all the local phone companies need, so one of them is bound to pick it up,” said Jeff Kagan, a telecommunications consultant in Atlanta. “These new-breed phone companies--Qwest, Level 3, Global Crossing and Teligent--are built to be sold as easily as operated.”

BellSouth and the other Baby Bells have been eyeing these upstarts as a quick way to piece together a national network to carry everything from long-distance to data.

Still, BellSouth has not yet won regulatory approval to sell long-distance service in its markets, and an attempt to boost its Qwest stake too soon might be tripped up by federal regulators.

Qwest, however, is not likely to wait around.

“These companies are constantly reinventing themselves. And they have to, because three years from now they could be facing a company that threatens their business that doesn’t exist today,” Kagan said. “Just like three years ago AT&T; didn’t see Qwest or Level 3 or Teligent coming.”

Qwest was first among the upstarts in mapping out an aggressive strategy that includes a huge investment in building its own network using emerging technologies.

Since its initial public stock offering in June 1997, Qwest’s shares have soared. Its current market value tops $30 billion, up from $2 billion when the company made its market debut.

On Wednesday, shares of Qwest rose $3.69 to close at $47 on Nasdaq, while BellSouth fell 6 cents to close at $46.06 on the NYSE.

The strength of its stock has helped Qwest finance a string of deals that gradually transformed it from a wholesaler of capacity to other phone companies to a provider of long-distance, data and Internet services to consumers.

Key to Qwest’s longer-range strategy was its $4.43-billion purchase of long-distance carrier LCI International Inc. last year. That acquisition helped solidify its push into full-service telephony.

Moving to tap the overseas market, Qwest formed a $1.2-billion joint venture with Royal KPN of the Netherlands in November. That pact gave Qwest a foothold in Europe, where it plans to offer data services in 40 cities.

Joseph Nacchio, Qwest’s chairman and chief executive, has said he plans to enter the Asian market by the end of the year.

Last week Nacchio announced that the company has invested $90 million in Advanced Radio Telecom, a wireless company that could give Qwest a direct link to homes its network doesn’t reach.

The company also invested in Covad Communications and Rhythms NetConnections, firms that offer high-speed Internet access. And in December, Microsoft invested $200 million in Qwest, forming a venture aimed at providing high-speed Internet service using Windows software.

“Qwest is evolving, and these investments are being made to hedge their bets and to use an extraordinary asset--their stock price--to buy some things,” said Roger Wery, head of the communications practice at Renaissance Worldwide Inc.

But Qwest needs more of what the entrenched phone companies already have: customers.

“Qwest has come a long way in a very short time,” said Scott Cleland, a telecommunications analyst at Legg Mason Inc.’s Precursor Group. “But it’s sort of like going to the racetrack without a car . . . so now they’re in search of traffic and customers.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Qwest Communications at a Glance

* Business: Provides Internet and long-distance phone service to businesses, consumers and other phone companies.

* Headquarters: Denver

* Chairman and CEO: Joseph P. Nacchio

* Employees: 8,500 worldwide

* Revenue: $3.02 billion in 1998.

* Chief competitors: AT&T;, MCI WorldCom, Sprint, Level 3, Teligent.

* Other: Since going public in June 1997, Qwest’s stock price has increased more than 700%. The company issued its second stock split on May 24.