Burdened by just about every corporate malady short of a bankruptcy filing, Qwest Communications Inc. tried resuscitating itself late last month by agreeing to sell off its yellow pages unit for $7.04 billion to The Carlyle Group and Welsh, Carson, Anderson & Stowe. And it may have actually worked, at least for the time being. Qwest shares leaped 24% to close at $2.95 the day the news of the sale broke.
The yellow pages business, named QwestDex, has been on the block since early May as part of the Denver-based telecom company’s ongoing effort to reduce its massive debt burden by selling non-core assets. Not only does Qwest have an outstanding $3.4 billion credit facility from Bank of America, but it will make approximately $2.3 billion in additional debt payments between Q3 2002 and Q2 2003. While the final sale price came in lower than the predicted range of $8 billion to $10 billion, sources say $7.04 billion is still enough to hold creditors at bay while the company tries to regroup.
The deal represents the third-largest leveraged buyout in history. In dollars, the equity contribution is significant, at $1.75 billion, but as a percentage of the purchase price it’s a low 25%. And Carlyle and Welsh Carson won’t even provide the entire equity portion, as sources say both firms are soliciting an outside co-investments of approximately $500 million. The two participating private equity firms will split their participation evenly, while the debt will be provided by Bank of America, J.P. Morgan Chase, Deutsche Bank, Lehman Brothers and Wachovia Securities.
The deal was sold at 7.5x EBITDA, and includes various safeguards related to an ongoing Department of Justice/Securities and Exchange Commission probe into accounting irregularities at Qwest.
“The sale is basically in line with historical directory sales, although perhaps it’s a bit on the low end because Qwest really needed to sell when it did,” says Tavis McCourt, a telecom analyst with Morgan Keegan.
Other analysts also hailed the deal, saying the long-term loss of reliable QwestDex revenue was far outweighed by the present need to reduce debt and reset multiples. “Qwest should be cutting everything that is non-core – like [an expected sale of their wireless towers] – and this was a big part of that,” says Greg Gorbatenko, an analyst with Loop Capital Markets.
The QwestDex sale also may have helped set a market price for smaller directories offerings on the market from Sprint and Bell Canada.
“Now Sprint has the ability to walk away from the table because their liquidity situation isn’t nearly as bad,” Gorbatenko says. “Qwest felt more like a fire sale, while Sprint is more easily digested.”
Who Lost Out?
Original bids came from two syndicates, including the one led by The Carlyle Group and Welsh Carson. Also involved in that group were Madison Dearborn Partners and JPMorgan Partners, although they both dropped out last month. “There were a variety of deteriorating market conditions and accounting troubles that led to the decision,” said a source familiar with the JP Morgan defection. “It’s not surprising, however, that Carlyle and Welsh Carson decided to go it alone.”
The other known bidder was a consortium led by TH Lee Partners, which already owns a yellow pages publisher in TransWestern Publishing. That very ownership, however, may have been a factor in the TH Lee group losing out as QwestDex management was nervous about a possible merger between their company and TransWestern. Moreover, TH Lee was widely reported to be interested in only one part of the QwestDex business, while Carlyle and Welsh Carson were willing to buy the entire package.
The final deal is broken up into two tranches, each of which has a different price tag and represents different states within the QwestDex coverage area. The first group, which is what TH Lee wanted, was sold for $2.75 billion and includes the states of Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. The second group is worth $4.3 billion and is slated to close next year. That piece will take longer to complete due to various regulatory issues in some of its affected states like Arizona, Utah and Washington.
Efforts to reach Carlyle Group’s Jim Attwood or Welsh Carson’s Anthony de Nicola by press time were unsuccessful.