Qwest buys back stock from BellSouth

(Telephony) Qwest Communications announced today that it is buying back just over 22 million shares of its stock from BellSouth Corporation, shares that were originally purchased by BellSouth in 1998. At $45 per share, the total value of the buy-back is $1 billion.

Qwest will use these shares largely for employee-benefit programs, including stock options and its employee stock-purchase program, according to a company spokesperson.

BellSouth approached Qwest about buying back its shares because the company needed greater liquidity, according to Joseph P. Nacchio, Qwest chairman and CEO.

“They expressed to me a need for liquidity to fund investments they’re already committed to,” he said. “This is strictly a financial transaction that has no bearing on the day-to-day relationship between the two companies. BellSouth is a very good partner, and we see this simply as an evolution in our business relationship.”

The partnership to date has yielded more than 200 customer contracts and better than $300 million in revenue for Qwest.

BellSouth primarily will use the $1 billion cash influx to fund three major initiatives: DSL expansion, continued Latin-America expansion, and the funding of Cingular Wireless.

“There’s really nothing clandestine about what’s going on. There’s no shortfall, no extra dollars that are needed all of a sudden. We just don’t need an equity ownership in Qwest to continue this relationship,” said a company spokesperson. “We saw an opportunity to get some dollars and fund our high-growth areas for this coming year. Who can’t use extra money in this environment? This just gives us a good financial cushion.”

After the transaction, BellSouth will hold 51.78 million shares of Qwest, approximately 3.1% of the outstanding shares. The buy-back agreement contains a lock-up provision that prevents BellSouth from selling any of these shares for the next 12 months—until January 15, 2002—with one exception. Beginning on February 16, BellSouth will be allowed to sell up to 11.1 million of these remaining shares, at its discretion, during the lock-up period.

In addition to selling back the stock, BellSouth also agreed to purchase an additional $250 million in services from Qwest over a five-year period. BellSouth will pay for these services in Qwest stock over four years. Prices for these shares have already been negotiated. For purposes of this transaction only, the pre-set stock price will be $47.58 on 12/31/01. The price will go up roughly 5.75% in each ensuing year until it caps at $56.27 per share on 12/31/04.

“We don’t necessarily believe that this will reflect the actual stock value, but it is what we negotiated,” said Nacchio.

He added that requiring BellSouth to pay for the services in stock rather than cash was a good move for Qwest, because it allows the company to retrieve a quarter-billion dollars of its stock without further dilution.

If BellSouth decides to sell the 11.1 million shares on February 16, Qwest probably won’t be the purchaser said Nacchio, at least not directly.

“We’re working with them to find private placement of these shares,” he explained. “We have already introduced them to the Qwest pension fund, which is a separate outside fiduciary. We believe that purchasing back our shares at $45 a share was a good decision for Qwest shareholders, and I would hope that our pension-fund managers would read something into that.”