Qwest Purge Continues

At Qwest Communications International Inc. (NYSE: Q), the spring cleaning might be done by Christmas. The company took a big step towards ridding itself of cobwebs and remnants of the Nacchio era yesterday when it announced that president and COO Afsin Mohebbi plans to resign by year's end (see Qwest COO Quits).

The distressed carrier said in a statement yesterday that Mohebbi, who is the highest-ranking company official to exit the company since former CEO Joseph Nacchio was pushed out back in June, will leave on December 31, “to spend more time with his family and pursue other business opportunities in the future.”

Mohebbi, who has spent three and a half years with the carrier, was widely considered to be Nacchio’s right-hand man during the boom-years at Qwest, and is suspected by many to have driven a strategy that pressured employees to increase company revenues at any cost. This drive for ever-growing revenues has received much of the blame for the company’s misleading accounting of more than $1.5 billion in revenue. Last month, Mohebbi testified before the House Committee on Energy and Commerce that was investigating Qwest’s accounting for capacity swaps with bankrupt carrier Global Crossing Holdings Ltd. (see Did Qwest Qwash Morgan's Analysts?).

Ever since he left Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) to take the helm at Qwest, Richard Notebaert has been cleaning house (see Notebaert Takes Out Nacchio). In an attempt to regain investor confidence for the company that has been embroiled in accounting scandals and continues to teeter on the brink of bankruptcy, Notebaert has gradually replaced executives linked to the high-flying, now tainted, Nacchio era.

Shortly after Nacchio’s departure, Notebaert replaced the company’s former CFO, Robin Szeliga, with former Sorrento COO Oren Schaffer (see Qwest Drafts Former Sorrento COO), and the company recently appointed Rich Baer to take over the position of general counsel and executive vice president in charge of legal affairs, after Drake Tempest leaves the company next month (see Qwest Hires Rich Baer). Before coming to Qwest, Baer was the chair of the litigation department at the Denver law firm Sherman & Howard LLC.

“The chief operating officer leaving is not a surprise,” says Guzman & Company analyst Patrick Comack. “Notebaert is trying to clean house. I think there are more to go… There are still a lot of Nacchio henchmen left.”

Qwest said that it does not plan to fill the positions being vacated by Mohebbi. While QwestDex president and CEO George Burnett will report to Qwest’s executive vice president and chief human resources officer Barry K. Allen, the following directors, who have been reporting to the company president and COO, will report to Notebaert once Mohebbi has left:
  • Augie Cruciotti, executive vice president, network services group
  • Clifford S. Holtz, executive vice president, business markets group
  • Annette M. Jacobs, executive vice president, consumer markets group
  • Patricia A. Engels, executive vice president, wholesale markets group
  • Teresa Taylor, senior vice president, products and pricing group
In another attempt to clean up its image and stave off a possible bond default, Qwest announced yesterday that it is offering a debt exchange for $12.9 billion in bonds (see Qwest Offers Debt Exchange). The bonds will be exchanged for $4 billion in new senior subordinated secure notes of Qwest Services Corp., the company said.

The exchange is meant to help the carrier reduce its approximately $24 billion debt load and enable it to extend some of the payments falling due over the coming years. Qwest will pay double the interest on the new bonds. In exchange, the bondholders have to agree to receiving less than par value, and in some cases later payments.

Under the deal, bonds coming due between 2004 and 2009 will have later maturities, giving the carrier more time to make its payments. Bonds now due by 2011 or later will, on the other hand, have to be paid back earlier.

“We believe [the debt exchange] should reduce [Qwest’s] debt principal by $2.6 billion,” Comack writes in a note today. “More importantly, it would extend the maturities of the company's debt, which would give Qwest a stronger balance sheet and more time to turn itself around.”

While observers say that the exchange is a good move for Qwest, some think that the carrier will have a hard time selling the deal to its creditors, since it doesn’t have a lot of cash with which to entice them. If it decides to offer equity instead, it could have a negative, dilutive effect.

“I still don’t think their stock is worth more than 30 cents a share,” Comack says, pointing out that the company continues to be marred by a rash of investigations into its accounting practices, as well as by its earnings restatements. “They’ve got a lot of problems. They’re not a money-making business.”

The bond exchange is the latest of several measures implemented by Qwest to reduce its debt levels and improve its balance sheet, including renegotiating the terms of its credit facility and selling its QwestDex Yellow Pages business (see Qwest Closes QwestDex Sale ). The exchange offer follows the carrier’s announcement last week that even after it completes the entire $7.05 billion QwestDex sale, it could have trouble servicing its debt after 2005.

Following yesterday’s news, Qwest’s stock climbed 7.16 percent in trading today, jumping from $4.33 to $4.64 a share.

— Eugénie Larson, Reporter, Light Reading
BobbyMax 12/4/2012 | 9:18:41 PM
re: Qwest Purge Continues Due to Nachio's inability to manage Qwest, the company lost its credibility. If Nachio had done anything new, the company's revenue would still be over $17 Billion. Noone would have lost their pension funds. Nachio actions have affected thousands of employees and millions of shareholders.

The Qwest board did not participitate in the governace of the company. In fact, one of the board members was doing brisk business with the company.

It is hard to say how much the company has changed under the leadership of the new CEO. He has not made any announcement as to the expansion of business.

The company has a debt of $24 Billion. The CEO has not presented any plan to get rid of debt.

This new guy still does not have any communication with the outside world.

It is still not clear if he stopped the corrupt practice of dolling out stock options.

It is also not clear how is going to bring competent people to the organization.

It should also be noted that the company has not frozen the severance pay package.Is the new CEO planning to do the samething? I would suggest that his salary be no more than 50 times the average salary of workers at Qwest. He has not worked on the business plan. This simply means that the CEO has no idea about the growth of the business.

Like Xerox, Unisys, AT&T, Motorola, etc., the CEO can pay himself forever without ever making the company profitable.
luingolden 12/4/2012 | 9:17:40 PM
re: Qwest Purge Continues I doubt that anyone with previously issued (and still un-exercised) Qwest stock options find that they are worth anything today regardless of whether the company cancels the policy or not. Check the strike price.

Any Qwest stock option plan may help save what's left at Qwest. Don't be too quick to cut off your nose to spite your face!

I don't care how much the top executives earn if the stock value appreciates due to their contributions.

I think to say otherwise assumes that you don't want to pay for performance.

Simply because the new CEO (Notebart) hasn't publicly announced his strategic plan does not indicate anything about his knowledge of the growth of the business.

If the company's managers are able to revive the stock price to levels where previously issued stock options are valuable again, they deserve the reward!
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