Mergers & acquisitions

Qwest Sells Directory Service

After months of promises that its directory service would bring it some much-needed cash, debt-saddled carrier Qwest Communications International Inc. (NYSE: Q) announced today that it has sold QwestDex for $7.05 billion.

The sale brought to an end a four-month-long auction for the yellow pages unit, which Qwest at one point said could bring it as much as $10 billion (see Qwest Gets Bids on Directory and Qwest Gets Yellow Pages Bids). Despite the low price, today’s announcement seems to have quelled investor fears that the company, which has recently suffered huge losses and has admitted to having misreported more than $1 billion in sales, could run out of money by the end of the year (see Qwest Piles Up $1B in Losses and Qwest Backtracks Fast).

“This definitely bought them some time,” says Phil Jacobsen, a general partner at Network Conceptions LLC. “The need to move immediately and react out of desperation is no longer there... Ultimately, [however], I think they’re going to have to sell out.”

Following the news, the Denver-based carrier saw its stock price soar nearly 30 percent in morning trading, up 64 cents to $2.88 a share. Not long ago, the company’s shares were teetering close to the $1 mark. Despite the improvement, Qwest’s stock is still trading 88 percent lower than its year-high of $24.20 a share.

The deal calls for a buyout group, led by The Carlyle Group and Welsh, Carson, Anderson & Stowe, to purchase the unit in two stages, bringing Qwest $2.75 billion by the end of this year (see Qwest Sells QwestDex for $7.05B).

Qwest acknowledges that there were other bidders for the directory unit, but won’t reveal how many or who they were. According to reports today, however, Thomas H. Lee Partners, Bain Capital and Providence Equity Partners also issued a collective bid for the directory service, but that group only wanted to buy the operations in the 10 states where getting regulatory approval was expected to be simple.

Qwest says the deal will be completed in two phases to speed up its access to the proceeds, which will go toward paying down its towering $26.5 billion debt load and funding its operations. The arrangement also will allow the buyers to gain control of the assets more quickly.

In the first stage of the deal, the buy-out group will purchase operations in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. Qwest hopes to complete the sale of the remaining operations in 2003, bringing it $4.30 billion, but warns in a statement that certain state regulatory approvals are still needed, and that the buyers still need to secure additional equity financing. That financing may be provided by Qwest itself. [Ed. note: Qwest buys its own directory service?]

Both stages of the deal are still subject to customary closing conditions, the company warns.

News of the sale is a welcome change from the bad news that has been plaguing Qwest in past months. Two weeks ago, the company posted a $1.1 billion loss for its second quarter and cut its full-year forecasts for 2002. The company also recently revealed that it will have to restate results from 1999 to 2001, after discovering that it had misreported $1.16 billion in sales. Observers say that any restatement could jeopardize the company’s debt covenants, which require it to keep its debt from exceeding four times its cash flow. Qwest, which is in negotiations with its lenders to amend the terms of a $3.39 billion credit agreement, says that it expects the QwestDex sale to help it avoid violating its current covenants.

While the sale might give Qwest some breathing room, some think it won't help the carrier avoid violating its debt covenants in the long run. “Yes, it helps them out near-term, but they still have way too much debt,” says analyst F. Drake Johnstone of Davenport & Co. LLC. Pointing out that Qwest has more than $4.5 billion in debt payments coming due next year, and more than $2 billion more due in 2004, he says he expects the company will have to restructure its debt within the next 12 to 18 months.

In addition, he says, once the revenues from QwestDex disappear, the company will probably be operating in the red. “[QwestDex is] a lot more profitable than other Qwest businesses,” he says. QwestDex distributes about 45 million directories in 14 Western states and generated $1.6 billion in revenue last year.

Almost 2,600 of Qwest’s 55,000 employees work for the directory service. Qwest spokesperson Steve Hammack says he doesn’t know what will happen to the employees when the deal is done. “After the sale is completed, it’s better to ask the buyers,” he says.

— Eugénie Larson, Reporter, Light Reading

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