US West Reportedly Rejects Deutsche Telekom’s Overture
Acquisition-hungry Deutsche Telekom of Germany broke off merger talks with Qwest Communications International Inc. and US West Inc. late Thursday after being soundly rebuffed by US West, according to people familiar with the matter.
Denver-based US West said it rejected Deutsche Telekom’s buyout offer because it would have broken up its more lucrative pending merger with Qwest, also of Denver.
In the wake of the rebukes, Deutsche Telekom may seek to resume talks with other potential targets, including Europe’s Cable & Wireless or Bermuda-based Global Crossing Ltd. BellSouth, the regional Bell company that owns 10% of Qwest, may also be drawn into the fray.
“I think every [telecommunications] company will be in play on the rebound, they’re all on the list,” noted an industry executive. “The whole sector is in play--at every level.”
Deutsche Telekom’s acquisition hunt is sure to further accelerate the pace of international consolidation in the merger-crazed telecommunications industry, and the right deal would virtually assure Deutsche Telekom a spot on the roster of survivors.
Although the German phone company is one of the largest in the world, analysts say its future is uncertain if it cannot gain ground in the United States, which remains the largest single communications market.
That’s because the telecommunications industry is now global, and phone companies must have a worldwide presence to snare the lucrative corporate customers that are demanding seamless connections for their far-flung international operations.
“Deutsche Telekom is among the weakest of the potential top 10 players, and that’s because they have no presence in the United States,” said Roger Wery, a telecommunications expert at consulting firm Renaissance Worldwide Inc.
Global Crossing, a growing telecommunications firm with executive offices in Beverly Hills, has acknowledged that it held exploratory discussions with Deutsche Telekom more than six weeks ago. Company executives have said there are no active merger talks between the two companies.
The move by US West came amid reports that Deutsche Telekom made separate offers to buy both it and Qwest for a combined price of more than $100 billion.
US West, which provides phone services in 14 Western states, expects to get the equivalent of more than $100 per share through its merger with Qwest. Deutsche Telekom’s offer amounted to about $90 per share, according to published reports.
US West said it will consider a new offer only after its merger with Qwest is complete and if the offer is at least as good as the Qwest transaction, US West Chief Financial Officer Allan Spies said.
In a statement bound to further strain relations between the two merger partners, Qwest Chairman Joseph Nacchio said, “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.”
Without the cooperation of merger partner US West, it would have been difficult--if not legally impossible--for Qwest to continue separate merger talks with Deutsche Telekom.
But if Qwest could somehow extricate itself from the US West merger, analysts believe, the company could collect a big premium by selling to Deutsche Telekom. Indeed, the German firm’s recent offer reportedly amounted to a 50% premium over Qwest’s current share price.
Even so, pursuing Qwest without US West could trigger a lengthy and expensive legal battle, and Deutsche Telekom is determined to act fast to assure itself a strong presence in the crucial U.S. phone market.
For Deutsche Telekom, which is armed with $14 billion in cash, there is a sense of urgency to the overtures. The German government in June will sell off more of its controlling stake in the phone company, which will leave it more vulnerable to competition in its franchise market.
In addition, with so much rapid-fire deal making, Deutsche Telekom wants to make sure it is not left without a partner, analysts said. Last year, the company was outmaneuvered by Italy’s Olivetti and had to drop its bid to buy Telecom Italia.
“Ultimately, Deutsche Telekom cannot afford another public failure,” Wery said. “But unless there is a catalyst, it will take a while for us to see something more than an announcement of an offer.”
Some believe that Deutsche Telekom would prefer to buy only Qwest and to forgo the regulatory headaches that come with owning a local phone company such as US West. Under that scenario, Deutsche’s small-premium offer for US West would be designed to keep the peace and avoid the legal battle that would ensue if Qwest dropped out of the US West merger.
“Everyone [has been] trying to do a deal that is friendly and that includes US West, but if US West overplays its hand, Qwest has a lot of options,” said Tom Friedberg, research analyst at Janco Partners. “Both Qwest and Deutsche Telekom want to get bigger, and they’re not going to let [US West Chairman] Sol Trujillo stand in their way.”
Still others believe that Deutsche Telekom needs both Qwest’s national long-distance network and the local lines and millions of customers that come with US West--and that the dual-offer reflected that need.
Wall Street investors, always energized by merger talk, have kept close tabs on the ongoing speculation.
In Thursday New York Stock Exchange trading, Qwest shares rose $6.19, to $60, while US West’s stock jumped $6.88, to $76.50. Deutsche Telekom’s American depository receipts rose 81 cents, to $93.06, while BellSouth shares rose 87 cents, to $46. Global Crossing’s stock rose $1.88, to $55.19 in the Nasdaq trading.
“All these [companies and executives] have big egos and big ambitions,” noted Wery of Renaissance Worldwide. “Now is the time to place your bets.”
For now, it seems, the only certainty is that Deutsche Telekom is determined not to leave the U.S. empty handed.
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Bloomberg News was used in compiling this report.
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Germany’s Telecom Giant
Deutsche Telekom is the largest telecommunications company in Europe and No. 3 in the world behind AT&T; and Japan’s NTT (Nippon Telegraph & Telephone) in terms of revenue. The company has operations in more than 65 countries, including Great Britain, France, Hungary, Poland, Russia, Israel, Canada and the U.S.
* Headquarters: Bonn
* History: Formed in 1989 by separation of West Germany’s telecommunications services from nation’s postal system. Went public in 1996.
* Employees: 186,000
* 1998 sales (Latest annual figures available): $41.9 billion
* Product areas: Telephone service, mobile and data communications, cable/broadcasting
* Selected subsidiaries: T-Online, Europe’s largest Internet service provider; One 2 One, British wireless provider
* Competitors: AT&T;, IBM, America Online, Mannesmann, Vodafone AirTouch Sources: Company Web site, Hoover’s Company Profiles Database, Times files
Researched by NONA YATES / Los Angeles Times
