BellSouth Takes a Stake in Qwest

Posted: 06/1999

BellSouth Takes a Stake in Qwest
By Ken Branson

BellSouth Corp., Atlanta, ever anxious for the day when it can offer long distance
service, has taken a $3.5 billion, 10 percent stake in Qwest Communications International
Inc., Denver. The companies will share sales forces and technical resources, marketing to
each other’s customers when BellSouth is allowed to offer long distance service.

Under their agreement, BellSouth will pay Qwest $1.93 billion for 20.35 million new
shares of stock, and will pay Qwest’s principal shareholder, The Anschutz Corp., Denver,
$1.57 billion for 16.65 million shares. Anschutz continues to be the largest single
shareholder in Qwest, with about 39 percent of the company.

"The arrangement provides for a coordinated marketing effort targeting large and
mid-size business accounts," says Rick Weston, Qwest’s vice president-marketing and
strategic accounts. "That will accelerate our revenue growth. The intent, where the
customer invites us to come in together, is that they (BellSouth) clearly have a
longstanding relationship with many of these customers. They’ve done a terrific job in
terms of building their rep around great customer service."

SBC Communications Inc., San Antonio, also acquired stakes in long-haul providers
recently–a 10 percent stake in Williams Communications Group Inc., Tulsa, Okla., and a 4
percent stake in Concentric Networks Inc., Cupertino, Calif. Weston maintains that their
agreement is different from those between SBC and Williams and Concentric.

"We’re different from SBC and Williams," he says. "We have a more mature
set of products. Williams’ network, as you’re aware, is still in large measure under
construction. Our network is nearly completed. We bring to the party a full set of
products from basic voice to e-commerce. We also have in the field a fully functioning and
trained sales force, so we expect synergies (between Qwest and BellSouth) to be more
immediate. …While they may aspire to what we have with BellSouth, they are some time
behind us."

And BellSouth, in a prepared statement, makes clear its position that this agreement is
nothing like the marketing alliance struck between Qwest and US WEST Inc., Denver, which
later was struck down by the courts. BellSouth will not represent Qwest to its customers,
will receive no fee for Qwest sales and will distinguish in its joint proposals with Qwest
between "interLATA (local access transport area) services provided by Qwest and
intraLATA services provided by BellSouth." BellSouth Telecommunications Inc.,
Atlanta, BellSouth’s regulated subsidiary, is not a party to the agreement, and BellSouth
and Qwest promise to obtain services from BellSouth Telecommunications "under tariffs
or nondiscriminatory agreements."

The companies say that once BellSouth is allowed to offer long distance service, they
will offer "seamless, high-capacity and high-speed network services such as frame
relay, ATM (asynchronous transfer mode) and Internet protocol (IP) and advanced
applications including web hosting, electronic commerce, managed network services, video
streaming and enhanced virtual private network (VPN) services."

BellSouth’s acquisition of equity in Qwest is subject to federal review under the
Hart-Scott-Rodino Act. The equity transaction is expected to close by the end of May.

Jeffrey Kagan, an independent telecommunications consultant based in Atlanta, says the
deal is a good one for both companies. He also says it "fills in the blanks" in
BellSouth’s data strategy. "It positions BellSouth to offer data services today,
where they are allowed, and to hit the ground running as soon as they are approved to sell
long distance," Kagan says.

As for Qwest, aside from the $3.5 billion infusion of cash, Kagan says, the main
benefit may be a new "de facto sales force" in the southeastern United States.
"This gives Qwest a powerful inroad to all the customers in the South," Kagan
says.

Kagan says that the difference Weston maintains exists between the BellSouth/Qwest and
SBC/Williams and SBC/Concentric deals is real, but temporary. All the companies involved
are doing the right thing to protect their customer base and expand it, he says.

"I think we’re talking about shades of gray here," he says. "All that
Qwest has done, they’ve done in the last couple of years. And a couple of years from now,
Williams may have done it, too."