Apr 22

Qwest Agrees to Merge with CenturyTel

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Today, Qwest Communications and CenturyTel announced their agreement to merge their operations valuing Qwest at roughly $10.6 billion.  On a pro forma combined basis, the two companies would have had 2009 revenues of $20 billion, $3.4 billion of free cash flow, 17.3 million access lines, and 5.2 million broadband subscribers.

Despite expectations that it will take up to a year to receive the necessary approvals, will it actually close?  I have my doubts.

Qwest has been rumored as a merger partner for years.  Its principal territory in a 14-state western region offers a lot of geography, but relatively few people.  With a fixed-line business and the migration of residential customers to wireless (which Qwest basically doesn’t have), this is not a recipe for success.  In fact, it’s a crappy story.

CenturyTel is offering Qwest shareholders the promise of better dividends in the future in an “all share” offer.  Yes, all share!  Certainly not a Warren Buffett deal.  Mr. Buffett almost always believes his company’s shares are fairly valued – at worst.  He cringed when he had to issue shares to finance a portion of the BNSF transaction earlier this year.  Maybe the executives think the current value of CenturyTel (CTL) is as good as it is going to get.  It is trading close to its 52-week high.  And maybe Qwest executives have tired from their Sisyphean task to do something meaningful with the company.

CenturyTel expects to be able to drive $575 million of annual costs out of the combined business highlighting reductions in corporate overhead, network and operational efficiencies, IT support, increased purchasing power, and advertising/marketing.  Qwest’s announcement earlier this year that it would not renew the lease on its corporate headquarters next year probably contributes more than $10 million to this savings.  Hmmm, together that sounds like job reductions in addition to many remaining jobs leaving Colorado.  That probably won’t be popular among unions and politicians.

At the end of the day, Qwest needs to do something.  It is a dinosaur that has not kept up with the times.  Maybe blame this on the late 90s and Joe Nacchio, where acquisitions and debt put them behind the 8-ball.  But we shouldn’t underestimate the resistance from regulators to approve another horizontal merger, and the desires of western state communities that still enjoy a sense of autonomy.

That said, maybe by 2012 a new Supreme Court will use the 30th anniversary of the Modification of Final Judgment to overturn the breakup of AT&T and begin to rebuild ol’ Ma Bell.

BA

Apr 15

Tax Day – Even at 1600 Pennsylvania Avenue

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Today marks the tax deadline for filing individual income tax returns.  For me, I always extend so my accountant can prepare the return during a less busy time.  But for others, including President Obama and Vice President Biden, they hastily compile their information in order to meet the April 15 cutoff.

Now for Mr. Biden it seems that his financial arrangements are not too complicated.  He basically gets his V.P. salary, his pension from serving in the Senate, and social security benefits.  Despite his $333,182 of adjusted gross income, his charitable giving was a noticeably stingy 1.4% at $4,820.  Most of his itemized deductions involved state income taxes ($17,718), real estate taxes ($13,320) and mortgage interest ($30,349).  Mr. Biden paid about 27% of his income for combined federal and state taxes.

For Mr. Obama the picture is vastly different.  In reporting adjusted gross income of $5.5 million, his presidential salary is dwarfed by his $5.2 million of income as an author.  Paying $1.8 million of federal taxes represented about 33% of his income.  Combined with state income taxes, more than 35% of his earnings went towards taxes.  To Mr. Obama’s credit, he has made significant charitable contributions totaling almost 6% of his income. (In 2008 the Obamas gave about 6.5%.)  Note that this excludes the monies from the Nobel Peace Prize that he directed to other charities in early 2010.

Now before too much credit is bestowed upon the charitable Obamas, we should also take a look at that crusty ol’ conservative, George W. Bush.  With taxable income of $642,905 in 2006 and $923,807 in 2007, Mr. and Mrs. Bush were able to reach into their pockets and contribute 12% and 18%, respectively, to charitable organizations.  The Cheneys have also given significantly to charity.

It is commendable that the Obamas have “up’d their game” on charitable giving.  It is the personal nature of our charitable acts that truly makes a difference.  Maybe Mr. Biden should take notice.  In Mr. Obama’s own words, “we can do better.”

BA

Apr 08

The Imminent Market Crash (Guest Contribution)

Nation, World Comments Off

The stock market has risen meteorically in the past 13 months. There are five compelling reasons why the 75% rise in the S&P 500 will abruptly and violently reverse.

First, the global economy is beginning to hemorrhage from the pressures of worldwide deficit spending. The defaults in Dubai and Greece are recent examples; once the contagion spreads, the whole system is in danger of collapse.

Second, consumer spending drives the US economy, but with continued high unemployment, tight credit standards, upside-down real estate holdings, and likely tax increases, consumers will not have access to money to continue spending.

Third, the banking system is a ticking time bomb. Banks are more concentrated and “too big to fail” than ever before. Banks continue to underestimate the financial consequences of defaults on residential and commercial real estate loans and credit card losses. Meanwhile, sophisticated and opaque financial instruments continue to be developed and sold without meaningful regulation or understanding.

Fourth, as shown by modest trading volumes, the current stock market rally is not based on strong convictions. Absent this strong base, any negative economic news can send the market into a free fall.

Fifth and most important, is the strong inverse correlation between my personal investing decisions and the market. For example, I invested the entire proceeds from the sale of a house in the stock market at the market high in October 2007. After riding the market all the way down, I sold most of my holdings at the market low in March 2009. Right now, virtually all of my investable assets are long US and emerging market stocks, which strongly signals a market reversal.

Rich Devlin

Apr 01

Turning People Into Patients

Colorado, Nation Comments Off

Tuesday’s New York Times ran a piece entitled “Risks Seen in Cholesterol Drug Use in Healthy People.”  I don’t typically read these, but the headlines caught my attention.

In summary, after a study of about 18,000 people over a little under 2 years (versus a planned 5 year study), in February the FDA approved a new criteria for the use of Crestor, the second best selling statin after Lipitor.  The new criteria would apply to a selection of “apparently healthy people” albeit other criteria, such as elevated inflammation in the body, would indicate some perceived increase risk level.  It is estimated that the change in criteria would add 6.5 million people to the already 80 million people who exceed the existing cholesterol-based guidelines.  About 40 million take statins.  A downside the article mentions is a potential increase in the risk of developing Type 2 diabetes – maybe up to 9%.

It is also noteworthy that Crestor has patent protection until 2016 and the drug costs patients about $3.50/day or more than $1,200/year.  If the same proportion of people take the statin as today (roughly 50%), the math would imply that this could expand sales of Crestor a few billion per year.

The article also focuses on the debate as to whether this is a good thing given the cost/benefit of putting these “apparently healthy people” on medication.

I don’t have any issues with someone spending $3.50/day of their own money, but it does raise a few questions in my mind.

  • Exercise and diet.  Have these become such foreign concepts that they are dismissed from the outset?
  • Will insurance companies pick up the tab?  If so, how do we ever expect to get a grip on healthcare costs with what appears to be fairly liberal standards?
  • If someone elects to take statins as a preventive measure under this new approval, will it not have negative impacts for any life or health insurance coverage they may seek in the future?
  • This is just one drug.  What others may be on the horizon under similar standards of application?

I don’t know the right answer, but I feel that we are offering people an easy way out.  Just take another pill.  At the end of the day, maybe we make it too easy to turn people into patients.

BA

I somehow found myself on this April Fool’s Day checking out some quotes by P.J. O’Rourke, the political satirist and former editor of National Lampoon.  I thought I would share a few below.

The mystery of government is not how Washington works but how to make it stop.

If you are young and you drink a great deal it will spoil your health, slow your mind, make you fat – in other words, turn you into an adult.

I like to think of my behavior in the sixties as a “learning experience.” Then again, I like to think of anything stupid I’ve done as a “learning experience.” It makes me feel less stupid.

There is only one basic human right, the right to do as you damn well please. And with it comes the only basic human duty, the duty to take the consequences.

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