Qwest's Quest to Ditch Its Debt

Financial sources are hinting that Qwest Communications International Inc. (NYSE: Q), with its incredible debt load and lack of hyper-growth businesses, is shopping for a buyer for some of its business units, or perhaps even putting the whole company on the block.

Several have pointed to recent stock activity as a sign that Wall Street is expecting something to happen with the company, especially given that there haven't been many other stock catalysts of late.

Qwest’s stock price has been rolling lately, climbing 23 percent over the past six months from $3.62 in early July to yesterday’s close of $4.45. The volume of shares being traded has also steadily crept up, hitting more than 10 million shares at the close of yesterday’s trading.

Of the four RBOCs, Qwest is the least healthy financially. It's the only one that has a total debt level ($17.1 billion) that is more than 120 percent of its revenues for the past 12 months ($13.87 billion). None of the other RBOCs -- SBC Communications Inc. (NYSE: SBC), BellSouth Corp. (NYSE: BLS), and Verizon Communications Inc. (NYSE: VZ) -- are hauling around that kind of debt relative to their revenues.

Some in the financial community believe that Qwest is looking to cut debt by dropping parts of its business or even selling itself outright. Qwest's long-distance business has been rumored to be on the block for months. ”I think that they would sell it if they got the right price,” says Legg Mason Inc. analyst Brad Wilson. “But finding a buyer is going to be tough.”

Wilson points to the fact that the long-distance business has been viewed by investors as a cash drain on the company. By selling those assets, Qwest could stop the bleeding and begin to pay down its debt.

Tim Horan, a telecom analyst at CIBC World Markets, thinks it makes a lot of strategic sense to break the company up, which would make its stock trade at a higher value. But he doesn’t believe the company would be attractive if shopped whole, noting its size would be a problem.

If a sale is in the cards, no one doubts Qwest's management team is up to the task. The company's chairman and CEO, Richard Notebaert; its top operations executive, Barry Allen; its CFO, Oren Shaffer; and its communications chief, Joan Walker, all were among the executive staff that sold Ameritech to SBC in 1999.

But who would be interested in pursuing Qwest’s assets if they were to hit the market?

The only companies with the size, financial might, and market need include Qwest's peers -- SBC, Verizon, and BellSouth. BellSouth has long been considered a suitor, even after the company divested its 10 percent stake in Qwest back in 2002.

And, SBC makes sense because many of its territories are right next to the states where Qwest has assets. But Tavis McCourt, senior telecom analyst at Morgan Keegan & Company Inc., says the RBOCs "haven’t shown any interest in consolidating, and they’re more interested in growing internally with their FTTP/FTTH initiatives.”

Level 3 Communications Inc. (Nasdaq: LVLT) is mentioned by several analysts as having an interest in a small slice of Qwest's assets. “Level 3 is a big consolidator, so they’d be on top of the list,” says McCourt. Of course, Level 3 has debt concerns of its own. The company's total debts are 142 percent of its revenues for the past 12 months.

One asset that may catch the eye of the other RBOCs looking to get into the triple-play space is Qwest’s nearly 16 million access lines. Geographic neighbors such as SBC or ILEC Alltel Corp. (NYSE: AT) may see buying instant access to a few thousand customers as a good opportunity.

But analysts say incumbent carriers are looking to spin out the number of access lines they have, not add to them, so it’d have to be a great deal for them to look at Qwest. “Verizon is looking to spin out its access lines,” says Legg Mason’s Wilson, “So, the market for these assets is not that hot.”

Some, however, contend that Qwest, with its high percentage of rural customers, isn't that interesting. “I think SBC and BellSouth would probably rather merge than take on Qwest,” says CIBC’s Horan.

Other carriers -- AT&T Corp. (NYSE: T), MCI Inc. (Nasdaq: MCIP), CenturyTel Inc. (NYSE: CTL), and XO Communications Inc. (OTC: XOXO) -- have been linked to Qwest at one time or another, likely because they could use Qwest’s assets to beef up their long-distance plays. “I could see an MCI/Qwest merger of equals,” says one analyst, who spoke on the condition of anonymity. “That way they could use MCI’s cash to even out their balance sheet.”

Those least likely to be involved in the game to decide Qwest's fate are the cable MSOs, analysts say. These providers find it cheaper to build than buy, and the regulatory hurdles to such a combination would be daunting. “Look at what Comcast has done by spending $100 million to build out its dark fiber network,” Wilson says. “It’s easier for them to do that than deal with an acquisition.”

Calls to Qwest seeking comment were not returned.

Whether Qwest's strategy is to carve itself up or just chip away at its debt, the only consensus in the financial community seems to be that there's more Qwest available than there are buyers. “I just don’t see a buyer across the board,” says Wilson. “Unless it is put out there at a really cheap price.”

"Qwest shares have soared 60 percent over the past four months, likely on increased optimism over the company's ability to improve its cost structure," wrote Legg Mason's analysts in a note previewing the carrier's next earnings report (due February 15). "Further upside is unwarranted, in our view, without greater demonstrated cost cutting and cash flow expansion."

— Chris Somerville, Senior Editor, Next-Generation Services