Predictions: Qwest profit in '06
By Jeff Smith
Rocky Mountain News

Thursday, November 3, 2005

Some analysts predict Qwest Communications will turn a small profit next year partly because of a $3 billion refinancing announced late Tuesday, which they said could trim interest costs by $200 million to $300 million annually.

One analyst suggested that, because of the extra cash, the Denver telco then could consider resuming paying a dividend to its shareholders.

Wachovia Securities boosted the company's stock rating from "underperform" to "perform," while the New York rating agency Moody's upgraded Qwest's debt ratings toward the higher end of the junk bond levels.

All the activity Wednesday resulted in Qwest shares rising 19 cents, or 4.4 percent, to $4.54 on one of its heaviest trading days ever.  More than 78 million shares changed hands, compared with recent averages of about 6 million.  Wednesday's volume was even higher than when reports surfaced last winter that Qwest was bidding for MCI.

But at least one analyst cautioned that Qwest still faces uncertain liabilities from pending civil lawsuits outside of Tuesday's $400 million settlement of a consolidated shareholders lawsuit.

Qwest, which has improved its profit margins by cutting costs, also has yet to prove it can grow its business - its revenues have been flat, and it continues to lose traditional voice customers. Jason Armstrong of Goldman Sachs still has the telco losing 11 cents a share next year.

The Denver telco wasn't shy about talking about the importance of its offer Tuesday to buy back $3 billion of 13 percent to 14 percent interest debt with cash and proceeds from a much lower-rate $1 billion convertible bond.

"This is a fundamentally transformative event for Qwest," spokesman Robert Toevs said.

Michael Rollins, a telecommunications analyst with Citigroup, projected that the interest savings from the deal will help Qwest earn a small profit of about 4 cents a share next year.

John Hodulik of UBS Securities also said he believes Qwest, which lost $144 million in its third quarter alone, could go into the black.

Christopher King, a telecommunications analyst with Baltimore- based Legg Mason, wrote that the additional cash flow from the debt refinancing potentially could put Qwest "in a position to consider implementing a dividend."

Qwest declined comment on the possibility of restoring a dividend.

U S West was paying a handsome quarterly dividend of 53.5 cents a share when Qwest bought it in mid- 2000.  That dividend immediately was slashed to 5 cents annually and then eliminated altogether when times got tough.  Former CEO Joe Nacchio used to say cutting-edge companies such as Qwest should reinvest their money in the business instead of paying a dividend.

While projecting a small profit for Qwest in 2006, Citigroup's Rollins also indicated that it's unclear whether Qwest will be able to resolve all of its pending civil claims without putting additional money aside.

Qwest announced this week that it had settled the largest group of those lawsuits for $400 million, tapping a $500 million reserve.  But another 10 lawsuits from the Nacchio era are pending.

Qwest Communications

Q: NYSE
$4.54
+ 19 cents

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