Court Denies Request to Quash QwestDex Deal –

Welsh, Carson, Anderson & Stowe and The Carlyle Group’s acquisition of Qwest Communications International’s QwestDex unit cleared its first legal hurdle, raised by Milberg Weiss Bershad Hynes & Lerach LLP, class action specialist.

The law firm filed a motion Nov. 4 in a Denver federal court requesting that the judge block the sale of the company’s phone directory unit or halt the more than $7 billion in proceeds the company will receive from the deal.

However, Colorado U.S. District Judge Robert E. Blackburn denied the request, saying, “The proposed injunction would, in essence, likely cause Qwest’s current financing structure to collapse. That, in turn, would cause major disruption of the entire Qwest operation and possibly trigger a bankruptcy filing by Qwest. Such injuries to Qwest weigh more heavily than the potential harm the plaintiffs seek to avert.”

Milberg Weiss originally filed the lawsuit against Qwest on July 1, 2001, on behalf of Qwest shareholders and the New England Health Care Employees Pension Fund. This latest motion was based on Milberg Weiss’s belief that when Qwest acquired the directories business as part of its US West acquisition, it did so under false pretenses. The allegation stems from Qwest’s admission that it improperly booked over $1.5 billion in revenues in recent years, inflating its stock price prior to the US West acquisition. Qwest’s revelation sent the company’s shares reeling and opened up the door for the government to launch an investigation into its accounting. Qwest originally acquired US West in June 2000 in a $44 billion all-stock deal.

The terms of the original Qwest and US West merger pact contained a collar requiring that Qwest’s stock stay above $28.26 a share until the close of the merger, and if it fell below that level, US West would have been able to renegotiate the terms of the deal. In addition, there was an agreement stating that if Qwest’s stock fell below $22 a share for 20 consecutive trading sessions, US West would be able to step away from the merger agreement.

The lawsuit contends that Qwest used controversial swap deals up to and after the acquisition in order to keep its stock price safely above the agreed-upon floors to ensure that the deal went through. Milberg Weiss further states that the stockholders it represents have realized a 91% decline in the value of their shares over the past two years.

“As we have said all along, we believed the motion was completely without merit, and we’re pleased the court agreed and ruled in our favor,” said Qwest Chairman and CEO Richard C. Notebaert. In an earlier statement he said, “The sale of QwestDex is part of the company’s plans to strengthen its balance sheet and reduce its outstanding debt. By trying to stop the sale, or freeze the sale’s proceeds, Milberg Weiss hurts Qwest’s shareowners, customers, employees and retirees. This motion is contrary to the interests of the shareowners who Milberg Weiss claims to represent.”

Had the motion been granted it would have had severe consequences for Qwest. The firm indicated in a filing with the court that “[the plaintiffs] do not refute the inescapable conclusion that the relief they seek would make it more likely that Qwest would be forced into bankruptcy.” The company requested that the court decide on the motion quickly, as its sale of QwestDex was scheduled for Nov. 8. Prior to the directories deal, Qwest was in danger of defaulting on its $3.4 billion credit line, and the company has outlined plans to put the proceeds of the deal towards its $26 billion of debt. A source close to the situation said the lawsuit does not appear to have altered anything from the buyer’s side and both parties continue to move ahead with the deal. At the end of October, the two firms sold $975 million of high-yield bonds to facilitate the buyout, and the first part of the sale, valued at $2.75 billion, was concluded on schedule. The second part of the transaction, meanwhile, is expected to be completed in the third quarter of 2003.

The Carlyle Group and Welsh Carson agreed to buy the Qwest’s yellow pages unit in August for $7.05 billion (see Buyouts, 8/26/2002). The sale of the unit had previously been expected to fetch between $8 billion and $10 billion, but Qwest is hampered with approximately $5.7 billion in debt payments due by the second quarter of 2003. The deal is the second-largest LBO in history.