Cogent Communications (NasdaqGS: CCOI) examined the long-haul assets of Qwest Communications (NYSE: Q) and opted not to pursue an acquisition of them because the asking price was too high relative to its profitability, Cogent Chief Executive Officer Dave Schaeffer said at an investor conference today.
“The combination of the management’s expectation of valuation coupled with [its] negative cash flow quickly led us to conclude that we were not going to be an active bidder on that asset,” Schaeffer said in response to a question.
His comments appeared to confirm reports last month that Qwest was actively seeking buyers for the long-haul assets — a move that some analysts have said could allow Qwest itself to become a potent acquirer of rural carrier assets.
Those reports — which cited AT&T, Verizon and Level 3 Communications as likely buyers — said Qwest could be expecting its long-haul business to sell for $2 billion to $3 billion. At the time, Stifel Nicolaus analysts said it was difficult to estimate their value since Qwest has not broken out its long-haul earnings in years. “An assumption of approximately $700 million in annualized run-rate EBITDA is not unrealistic,” the analysts wrote in an April note. “If true, we believe the low end of the [$2-billion to $3-billion] valuation range would be more likely than the upper end.”
Most of Qwest’s long-haul revenue comes from voice services, Schaeffer said today, a fact that, combined with the business’ negative cash flow, should make Qwest well-motivated to shed those assets.
“I do think the asset will clear, as it is not seminal to the business that Qwest is pursuing — that is, its local access business,” he said. “In fact, [the long-haul business] is continuing to burn cash away from the local access business, retarding the cash flow of the company.”
He added, “Qwest has not been an active player in the wholesale transit market for several years. They do focus on some IP VPN services for larger corporate customers; that is really not a market segment that Cogent actively pursues, so I view the divestiture by Qwest of those long-distance assets, and a possible combination with one of the other players, as probably a non-event to the competitive landscape.”
Funny that Cogent would release this. Their entire network (mostly leased), to include peering relationships is a combination of networks acquired from distressed and/or insolvent companies and they still lose money. Mr. Schaeffer has used the press to lobby in the past when other NSPs de-peered Cogent and now he’s using them to beat down the price of a facility based asset. Additionally…has Qwest ever confirmed publicly the price of the long haul network and if in fact it was for sale?