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BellSouth's Wrongheaded Qwest

Our columnist's advice to Qwest execs: Don't join up with a boring, slow-growth company like this regional Bell.

It hasn't been easy lately owning Qwest (QWST) (which I am long), especially for long-term holders, which these days I take to mean you expect to still own it at the end of the trading day. The share price has been bouncing around. The market didn't respond as well as we expected to a late-May 2-for-1 split. And then there was that feint, when Qwest was talking with U S West (USW) about putting in a counterbid against Global Crossing's (GBLX) mondo bizarro merger proposal.

Now we have the



filing with the


, in which BellSouth said it has been considering purchasing the rest of Qwest -- it already owns 10% -- and it believes Qwest management might support the buyout.

A buyout by a regional


operating company has long been a possibility for Qwest, as I have warned before

here. Qwest is just too juicy a property not to draw the attention of heavily regulated, low-margin RBOCs, envious of its buried cable plant, its partnerships with all the right partners and, probably, its skilled management.

More, Qwest founder Phil Anschutz, by far the largest Qwest holder (even after selling 33 million shares to BellSouth as part of the RBOC's purchase of its minority stake), has said he'll do whatever it takes to maximize shareholder value, not excluding selling the company.

But, Phil, what about


-term shareholder value?

Because those heavily regulated, low-margin RBOCs are precisely the wrong kind of partner for Qwest. Even a relatively well-managed one, such as BellSouth.

That regulation is the key: A highflier like Qwest doesn't want to fall into the hands of a company that faces constant regulatory pressure. Toss Qwest's potential earnings in with the regulated-down returns of an RBOC, and you have the potential for putting on the brakes for Qwest's growth

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, as regulators eye those big numbers and take a retaliatory chunk out of the merged company's hide.

Moreover, the barely hidden agenda for BellSouth in this deal is to get ready for the time when the RBOCs can begin to sell long-distance service. They're banned from doing so now under federal law, but the broad consensus is that one or another of the RBOCs will get a court's OK to sell long-distance services later this year ... and that will break the dam for the others, which will jump into the business overnight.

Qwest is already the nation's fourth-largest long-distance company, so from BellSouth's perspective, it's a perfect partner for that great day a-comin'.

But what about the meantime? This is a deal that, unless it becomes the case that on appeal breaks down the door, couldn't be consummated until after that ban is dropped. By that time, Qwest will likely be trading well above today's sub-50 price. Why succumb now to an acquisition offer at the wrong price? Even if the deal does turn out to have a built-in recalculation/escalator clause?

Sure, Qwest has only recently moved into the positive side in quarterly earnings per share -- a penny or two for the past two quarters -- and fiscal year 1999 looks like only a dime-a-share year. But next year should be Qwest's coming-out party: I'm looking for 40 cents a share or better for FY2000.

It's not as if Qwest holders have been long-suffering souls, slogging through depressed share prices while waiting for the Big Payday. Since I first wrote about Qwest

here in December, when it was trading at a split-adjusted 20, it has more than doubled, trading at midday today around 46, up about 2 3/4.

So the return has been just fine. But the real gains lie ahead. Just building on its present investment in buried fiber and on its present deals with all those right partners, Qwest looks set for a substantial multiple of today's price over the next two or three years. Given continuing smart management and more dealmaking by a team headed by one of America's hottest CEOs, Joe Nacchio -- who is, as I've said before, one of the premier


managers as well as a solid corporate manager -- we should see an even larger multiple of today's price for Qwest holders two or three years out.

By contrast, would Qwest holders be able to do so well in the bosom of BellSouth? Since December, while Qwest has doubled, BellSouth has risen from 45 to today's ... 46. Over the past three years, BellSouth has soared from about 20 to today's 46, while Qwest, over the past two years (it went public in June 1997) has moved from a little over 7 to 46 -- better than a sixfold jump.

With a market cap in the area of $30 billion, Qwest is still eminently acquirable by the big players in telecom. These offers will keep coming, assuming BellSouth doesn't make its move. They'll get better and better. And they should probably still be rejected.

The trader in me likes the idea of BellSouth stepping up to pay a nice premium for the rest of Qwest -- anything less than 60 a share would be an insult, and I think it ought to be in the low 70s -- but the investor in me longs for Nacchio, Anschutz and their board to have the guts to continue to play out the dream, to shoot for the moon over the next few years.

Hey, Nacchio, you coulda been a champ. Heck, you still can be. But it's time to walk the walk on the future of a Silicon Valley-style tel-tech company with an immensely valuable buried-fiber asset. Don't join up with a boring, slow-growth, regulated company.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Qwest, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at