Qwest IPO Poised to Catch Wall Street's Bandwidth Fever

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By Kevin Petrie
Staff Reporter

Call it a

Qwest

for bandwidth.

The initial public offering of Qwest Communications International, registered with the

Securities and Exchange Commission

on Friday, marks a bold wager that phone carriers need more bandwidth -- simply put, broader pipelines for the Internet and phone calls.

Qwest is constructing a nationwide $1.4 billion network that is expected to connect 92 metropolitan areas with 13,000 miles of fiber-optic cable by the end of 1998. It leases that capacity to long-distance companies such as

WorldCom

(WCOM)

and

Frontier

(FRO) - Get Report

.

Denver railroad tycoon Phil Anschutz, Qwest's chairman and mastermind, has furnished the company with significant easement agreements for its expansion. He wisely invested heavily in Qwest's buildout when bandwidth seemed plentiful. Today, of course, nobody doubts that additional infrastructure is dearly needed. The closely held

Anschutz Corp.

also owns

Interwest Group

and a majority stake in

Internet Communications Corp.

(INCC)

, both office-system providers that will bolster Qwest's efforts to serve business customers.

Prior to announcing IPO plans, Qwest was perhaps best known for poaching a top gun from

AT&T

(T) - Get Report

. In December Joseph Nacchio ended a 27-year tenure at Ma Bell to become president and CEO of Qwest.

According to the filings, Qwest will issue common stock worth up to $287.5 million to finance its network expansion.

Salomon Brothers

,

Donaldson Lufkin & Jenrette

,

Goldman Sachs

and

Merrill Lynch

are underwriting the offering. Officials at Salomon could not be reached to determine the IPO date.

The equity registration comes on the heels of a debt offering that admittedly reflects market uneasiness. On March 31 Qwest sold $250 million in 10-year notes at a dismal interest rate of 10 7/8% -- 4 percentage points higher than a comparable Treasury note, and well within the junk range, according to

Moody's

and

Standard & Poor's

. Apparently bondholders look more askance at Qwest's prospects than Frontier and WorldCom. Most of the proceeds are earmarked for network construction efforts.

Still, the junk-bond status doesn't trouble analyst Kathleen Smith at

Renaissance Capital

, an IPO research firm that also manages a private investment fund. "That's how

MCI

(MCIC)

got to be where it is," she says, referring to the series of junk bonds that upstart MCI issued through Michael Milken at

Drexel Burnham Lambert

in 1981. She considers Qwest a strong offering, given the company's top management and revenue growth.

A marathon enthusiast and collector of Western art, Anschutz has made investments pay off. In 1984 he purchased the

Denver & Rio Grande Western

railway for $500 million. Four years later he leveraged that to buy a stake in

Southern Pacific Rail Corp.

, and agreed in August 1995 to sell it to

Union Pacific

(UNP) - Get Report

. He pocketed $1.6 billion before taxes. Shareholders did not fare so badly either -- from its August 1993 IPO until the time the merger was announced in August 1995, shares of Southern Pacific roughly doubled. It should be noted that earnings shrunk in 1995.

A national leader in providing bandwidth -- to date, the only other major wholesaler of long-distance service in this large market is

IXC Communications

(IIXC)

-- Qwest has protected itself from competitive pressures somewhat by forming tight contracts with WorldCom and Frontier. According to SEC documents, last year both carriers agreed to purchase some of Qwest's idle or "dark fiber" cables. Along with minor contracts, their commitment amounts to $575.2 million -- more than one-third the full cost of the Qwest network. Their 1996 payments comprised fully half Qwest's annual revenue.

To be sure, Qwest has to walk a fine line. In two ways its customers are rivals. The big four long-distance concerns, AT&T, MCI,

Sprint

(FON)

and WorldCom, all own national networks. They could build their own extra systems, and in fact they do. To prove its worth, Qwest has to lay all those wires more cheaply, then sell space on them at competitive rates. That proposition means rather thin profit margins.

And Qwest's SEC filings also say the firm intends to start serving businesses and consumers directly.

Finally, the bandwidth buildout is not cheap. As of Dec. 31, 1996, Qwest carried a long-term debt load of $134.5 million, compared with stockholders' equity of $9.4 million. Incorporating a March 31 debt issuance of $250.0 million, some of which was used to repay other debt, the pro-forma long-term debt would total $278.1 million. The company says in its filing that it expects to incur additional debt.

But Qwest has proven its ability to make money. In 1996 revenue increased to $231 million from $125 million the previous year. It also trimmed its net loss from $25.1 million to roughly $7 million in the same period.

The SEC document did not provide the price of the deal, number of shares offered or the size of Anschutz's personal stake. Anschutz will control the election of officials and the vote on other matters. Officials at Qwest declined to comment, citing an SEC-enforced quiet period.