Let the Qwest speculation begin

It's been a while since there have been juicy rumors about acquisitions on the telecom front. Sprint was the company keeping the banter going until recently, when Qwest's name was thrown into play.

Of course, it's no fun for the people who work at these companies to hear constant speculation about issues that impact their immediate personal future, so I don't want to seem gleeful in bringing up this sensitive topic. But it is interesting to consider all the possibilities.

When I saw this morning's news that Level 3 Communications had gone to credit market, I thought this was the sign of a pending acquisition. But the amount — $220 million — didn't make sense. And as David hold, analyst with Current Analysis, explained, this latest move has nothing to do with an acquisition.

"As you probably know, Level 3 engaged in a series of financial maneuvers at the end of 2008 to buy back debt and raise sufficient capital to see it through upcoming debt maturities in 2009 and 2010," Hold said. "These efforts were successful, and the company had enough cash to see it through 2010, barely. But that did not leave them with any excess cash for operational requirements, which would be fine as long as they generate positive cash flows in every quarter, as they have significantly reduced labor costs in the past year. But there was no margin for error, and the company historically runs a cash deficit in Q1, when bonuses are due. So raising a couple hundred million for general operating purposes seems reasonable, especially given the uncertain economic climate. Now they have a bit of a cushion should cash flows not turn positive after Q1."

Hold isn't ruling out a Level 3 purchase of Qwest, "but you would need to see much larger amounts of cash being raised, on the order of a billion or more," he said. "Alternatively, the company could quietly put together a financial package through a consortium of lenders with which to make a bid on Qwest, so as not to tip its hand prematurely. But that is all speculation at this point."

Because current speculators have ruled out AT&T or Verizon as a Qwest suitor, Level 3 would seem a likely option — unless one of the many international carriers doing business in the U.S. suddenly wanted a national backbone. Not likely, I know, but interesting to ponder.

E-mail me at cwilson3@telephonyonline.com.