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Our regional telephone monopoly, Qwest, is in trouble. It's deep in debt, and the Securities and Exchange Commission recently launched an investigation into its accounting practices.
That shouldn't have come as any surprise, since Qwest's accounting was questioned last year by another telephone company -- Citizens Communications of Stamford, Conn.
In 1999, Citizens agreed to buy 450,000 rural access lines in nine states -- Colorado among them -- from Qwest for $1.7 billion.
But the deal did not go through. According to a
Citizens press release of July 23, 2001, the company
discovered that there is a material shortfall in the
actual revenue coming from the exchanges it planned to
acquire versus what Qwest had contractually
represented.
As nearly as I can translate, that's a polite way of
saying Qwest lied to us and said these exchanges were
bringing in more money than they really were.
Thus our Qwest exchange in Salida didn't get sold to Citizens, and so I have to care about what happens to Qwest, a company founded by Denver billionaire Phil Anschutz, who remains a major stockholder.
His previous performance could provide some hints about Qwest's future. In 1984, he bought the Denver & Rio Grande Western Railroad in a transaction that was hailed by Colorado politicians as a way to keep the railroad's ownership and management in Colorado.
Four years later, he bought the Southern Pacific Railroad for $1.4 billion. It was losing money, so he started selling off assets, like California real estate. After stripping the Southern Pacific system, he sold it and the D&RGW to the Union Pacific for $4.3 billion in 1996.
Now consider his Qwest adventures, which began after he arranged to gut Colorado's freight transportation system.
He organized Qwest in 1996 to provide long-distance high-speed fiber-optic communications. In 1999, Qwest outbid Global Crossing to acquire US West, the Baby Bell that provided local telephone service in Colorado and 13 other states in the West and Midwest.
Colorado politicians hailed this as a way to keep ownership and management in Colorado. Since then, Qwest has been trying to sell assets. There was the failed deal with Citizens, and the company has talked of selling its profitable directory-publishing subsidiary.
Do you see a pattern here? It's a pattern that becomes more apparent with Qwest's recent hiring of Tom Middleton, a former mergers and acquisitions specialist with Merrill Lynch.
It seems fairly safe to predict that he'll sell some Qwest assets and then arrange a merger-acquisition, just as happened with the Anschutz railroads. The most likely buyer, according to the industry gossip I've seen, is BellSouth, which already owns 45 million shares of Qwest stock. Colorado politicians will not hail this as a way to keep ownership and management in Colorado, but they will continue to accept campaign contributions from Anschutz.
Despite Qwest's dismal financial status -- a recent Wall
Street Journal article mentioned that they may be the
first regional Bell to wind up in Chapter 11
--
Anschutz has done pretty well. That article noted that
Anschutz has cashed out $2.5 billion in Qwest stock since
1997.
Qwest stock has fallen from $51.75 after the merger with US West to $6.90 per share last Friday, which gives you some idea of how Wall Street regards the company's management.
Naturally, there are people with different opinions.
One is Joseph P. Nacchio, Qwest's chief executive. His
annual salary is in the millions (and he's made about $300
million selling some of his Qwest stock), and he has said
that he deserves it -- he should be allowed to make more
than a second baseman
since I create more economic
value than they do.
How much economic value has he created? There are about 1.67 billion shares of Qwest stock outstanding. Do the math with the stock prices, and you see that the company's value has fallen by 83 percent, from $86.3 billion to $11.5 billion.
That's an economic value
of a $74.8 billion loss,
and it's a libel on baseball. For an infielder to perform
like Nacchio, he'd need a negative batting average and a
negative fielding percentage, plus a propensity for
injuring his teammates while alienating fans so that they
quit coming to games.
Let's look at the bright side, though. There's a noble
act in this tale, by Sol Trujillo, who ran US West before
the Qwest acquisition. Once he saw how Qwest would do
business, he left, forfeiting $16.3 million in
compensation, rather than stay around to create economic
value
with Nacchio.
Plus, after Qwest finishes dismembering itself, downtown Denver should be rid of those hideous glowing blue signs, and those of us in the boondocks might get a company that wants to do business with us. That's all to the good, but on the other hand, we'll have to start wondering where Anschutz will strike next.
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