Contrasting Reactions to Telecom Mergers as Global Crossing and Qwest Pursue Frontier Corp. and U.S. West

The potential mergers between Global Crossing, Qwest, Frontier Corp., and U.S. West have elicited contrasting responses from bondholders and equity investors. The bondholders are optimistic about the mergers, as both Global Crossing and Qwest are looking to acquire stronger companies, which would benefit their respective credits and be a boon to noteholders. This optimism is driven by the fact that the companies being acquired, particularly U.S. West, are strong credits with investment-grade ratings. Global Crossing, in particular, stands to gain even if Qwest ends up winning the whole game, as it has an agreement that would result in a break-up fee of over $1 billion if it does not acquire any of the other companies.

Key Takeaways:

• Global Crossing and Qwest are pursuing merger discussions with Frontier Corp. and U.S. West, with both bondholders and equity investors showing contrasting reactions.
• The bondholders are optimistic about the mergers, driven by the strong credits of the companies being acquired, particularly U.S. West, which carries an investment-grade rating.
• Global Crossing stands to gain even if Qwest ends up winning, with an agreement that would result in a break-up fee of over $1 billion if it does not acquire any of the other companies.
• An acquisition of Frontier by Global Crossing would not face the same level of regulatory scrutiny as a buyout of U.S. West, and could potentially be completed by the end of the year.
• Global Crossing has made bids for both U.S. West and Frontier for $33.9 billion and $12.9 billion, respectively, while Qwest has offered $40.5 billion for U.S. West and $13.8 billion for Frontier.
• The stocks of Global and Qwest have been punished badly, with Global falling 29% to $43 per share since May, and Qwest dropping 27% to $34 a share since the beginning of June.

Statistics:

• Global Crossing's high-yield debt has traded down from 112 in May to 105, but is still expected to pick up again in almost any scenario.
• Global Crossing has one large $800 million outstanding issue, while its break-up fee from the agreement with Qwest would result in over $1 billion if it does not acquire any of the other companies.
• An acquisition of Frontier by Global Crossing would potentially avoid the regulatory scrutiny faced by a buyout of U.S. West, with the latter being one of the two remaining original Baby Bells.
• The potential merger between U.S. West and Qwest could complement each other's businesses, although there are reportedly issues with U.S. West wanting a true merger of equals.

Sources:

• [Financial Times, 1999]
• [Bloomberg, 1999]