Qwest Increases Stake in KPNQwest

Euro data network provider KPNQwest is involved in two separate deals that will see U.S. broadband communications firm Qwest Communications increase its stake, and will see KPNQwest expand in Europe with the acquisition of Global TeleSystems Inc.’s Ebone and Central Europe businesses.

KPNQwest, which is a joint venture between Dutch telecom concern Koninklijke KPN N.V and Qwest,
will sell 14 million shares of its stock to Qwest for $4.58 apiece, a bargain compared to the $5.65 a share the stock was trading at just after today’s opening bell. Also, Anschutz Co., Qwest’s principal shareowner, will buy an additional six million KPNQwest shares at the same price.

The deal will bring KPNQwest $91.6 million from both Qwest and Anschutz. The deal represents a 10 percent sale of KPN’s interest in KPNQwest to Qwest, which along with KPN currently owns about 44 percent of KPNQwest.

After the purchase, Qwest will hold about 47.5% of the voting power in KPNQwest, while KPN will have about 40% of the voting power.

“Owning a larger stake in KPNQwest is a well-timed strategic opportunity as KPNQwest significantly expands its pan-European leadership position; fully funds its business plan after a major acquisition, and accelerates free cash flow,” said Qwest Chairman and Chief Executive Officer (CEO) Joseph P.
Nacchio, who also serves as chairman of the KPNQwest board.

Qwest expects to close the purchase of KPN shares before the end of this year. The share purchase is subject to several conditions, including the execution of definitive transaction documents, consents of workers’ councils of KPN and KPNQwest, antitrust approval in the United States and Europe, and approval by KPNQwest shareholders of certain amendments to the KPNQwest articles of association, officials said.

Separately, KPNQwest said it would buy virtually all of Global TeleSystems, Inc.’s (GTS) Ebone and Central Europe businesses for approximately $580 million, including the assumption of debt. At the completion of the acquisition, KPNQwest will have a $450 million credit facility to fully fund the combined company until it becomes free cash flow positive in the fourth quarter of 2003.

The GTS acquisition will add to KPNQwest nearly 48,000 European accounts with recurring revenue. In addition, the number of Web hosting centers would more than double to 30. The expanded KPNQwest will be Europe’s top provider of data and Internet services with a 60-city, 15,600-mile fiber optic network connected to Qwest’s global network, officials said..

KPNQwest’s buyout of GTS will extend the KPNQwest fiber optic network deeper into the United Kingdom plus key areas of Eastern Europe, Spain, Italy, and Ireland with 14 metro fiber networks and 10 additional cities connected by fiber.

KPNQwest expects to close the acquisition of the GTS business about March 2002, also subject to conditions.

All is not wine and roses at KPNQwest, though. The company told Reuters that it will cut about 25 percent to 30 percent of its staff and take an 80 million euro restructuring charge, after its GTS purchase is complete.

Goldman Sachs, in a research note, said the key implication of the stock buy deal for Qwest is that it increases the U.S.-based firm’s control of the KPNQwest JV, as Qwest will now control 3 of 6 board seats and retain special voting rights, while KPN will have only 1 board seat and will lose its special voting rights.

Goldman Sachs also said the agreement will “have no impact to (Qwest’s) 2001 P&L because it is
not set to close until December.”

Qwest’s increased control and ownership of KPNQwest should also facilitate its global expansion plans, Goldman Sachs said. “While the GTS asset is wholesale focused and lacks a cherished large corporate customer base, it represents a relatively low cost expansion of a facilities presence onto the continent. This
capability can help propel Qwest (and KPNQwest JV) up the enterprise market ladder.”

Bob Woods is the managing editor of OpticallyNetworked.com.

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