Time to hang up on Qwest?

April 23, 2010

There’s something of a bond between Qwest Communications (Q) and footnoted. In 2002, my experience as an investor in Qwest prompted me to write Financial Fine Print and the company has been a frequent flyer here on the site, appearing in more posts over the years than any other company.

So when CenturyTel (CTL) and Qwest announced a $22 billion deal (including $11.8 billion of debt) to merge yesterday, we couldn’t just sit around and let it pass without some sort of commentary. We’ve listened to the hour-long conference call and we looked at the accompanying slideshow, both of which are peppered with the usual M&A buzzwords like synergy and transformational (we stopped counting the number of times synergy was used after we got to 10). There’s also a new (and pretty snazzy) website that provides even more information. And, as if that’s not enough, we counted 8 different filings made between the two companies just yesterday.

One of the slides that caught our interest was #14, which shows that while this deal is being billed as a merger of equals, all of the top managers are coming from CenturyTel. Ed Mueller, Qwest’s high-flying Chairman and CEO, will join the board, along with three other members of Qwest’s board. Perhaps that has something to do with Qwest’s stock performance since Mueller came on board in August 2007.

During the call, in response to a question from an analyst — one of the few who thankfully didn’t say congratulations — who asked why would Qwest do a deal now when they were believed to be turning things around, Mueller said he thought it was a really good deal and a really good time. Another analyst — from Goldman Sachs, who did say congratulations — asked CenturyTel CEO Glen Post III the same question, albeit from the other side: was Post worried that Qwest, which was viewed to be improving, might get away? While both CEOs stayed on-script related to the timing and whether there were any other interested parties, we couldn’t help but notice that at least two plaintiff firms have already announced plans to investigate the deal.

While the analysts asked lots of questions about the so-called synergies, one question we didn’t hear was about the hefty severance payments that Qwest executives are likely to receive. Indeed, a quick skim of the proxy that Qwest filed last month includes this pearl:

For Mr. Mueller the term —good reason also includes a reduction in title, and for Mr. Euteneuer the term —good reason also includes a reduction in title or a requirement that he report to any person other than our CEO or Board.

Given that clause and in light of slide #14 it seems that Mueller and Euteneuer, and probably a few other Qwest executives, stand to make some good money on the deal. Based on the proxy, which assumes a deal on Dec. 31 and a price of $4.21 for Qwest, Mueller stands to make $24.7 million on the deal and Euteneuer stands to receive $10.6 million. The other three named executives stand to receive $32.3 million. The real numbers will likely be significantly higher, given that the deal stock price works out to about $6.02 a share.

While we’ll still be on the look-out for the merger proxy, which should provide some updated information on those severance payments, it looks like we’ll soon have to hang up on Qwest. But it has been an interesting ride!

Image source: RedHouse Developments

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