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Qwest in no rush for acquisitions
Notebaert foresees cash flow increase up to $600 million
By Jeff Smith, Rocky Mountain News
Wednesday, November 9, 2005

Qwest Communications estimates it can increase its operating cash flow by as much as $600 million next year, eliminating the need to scramble to make acquisitions, the Denver telco's top executives said Tuesday.  "What we've said is, 'Sure we're going to be looking at possible acquisitions,' " CEO Dick Notebaert said in an interview with the Rocky Mountain News.  "But it has to be strategically complementary, and the price has to be right. We don't need to be in a rush."

Qwest earlier this year failed in a bid to buy MCI.

Notebaert said he feels Qwest "made a huge amount of progress" last week when it settled its large class-action shareholders lawsuit for $400 million and successfully completed the first step of a $3 billion debt refinancing.

The refinancing is expected to trim as much as $300 million of annual interest expenses.  In addition, Qwest has projected its cash flow will grow by $200 million to $300 million next year through continued cost-cutting and sales of high-speed Internet and other services.

Notebaert described the 40,000-employee, $14-billion-a-year company as closing the last chapter on the accounting scandal and financial precariousness his team inherited in the summer of 2002.

For example, in the debt refinancing, Qwest is buying back $3 billion of 13 percent to 14 percent debt issued in late 2002 just so the company could remain solvent, Notebaert said.

While the $400 million settlement of the largest lawsuit stemming from that era is a "lot of money, no matter how you count it," Notebaert said, it comes out of company reserves, and payments are staggered over time.

Qwest technically is still under investigation by the Department of Justice, but numerous sources familiar with the case have said federal prosecutors are focusing on former CEO Joe Nacchio and other executives.

The company is losing local telephone lines in its 14-state region at a rate of about 5 percent a year.  In the third quarter alone, traditional voice revenues were down $70 million, which translates to an annual loss of nearly $300 million.

But a big part of the reason Qwest thinks it can generate additional cash flow next year - and doesn't need to "knee jerk into some acquisition" - is that it is below the industry average in sales of high-speed DSL Internet service, long distance and other products, Notebaert said.

With DSL, Qwest has captured a market share of only 10 percent to 11 percent of the available homes, Notebaert said, while the industry average is 13 percent to 14 percent.

The company has mapped it out and thinks it could generate as much as $500 million of additional revenue if it caught up with the average of its peer group, he said.  That would more than offset traditional voice revenue declines.

Some analysts last week projected Qwest would make a small profit next year, after losing hundreds of millions of dollars a quarter.  Leading credit agency Moody's boosted the company's credit ratings a notch higher into the junk bond levels.  And Qwest's stock price has shot up 15 percent in recent weeks.  But other analysts think Qwest will continue to lose money, although at a much slower rate.

Qwest Chief Financial Officer Oren Shaffer noted that a $1 billion convertible debt issue, which is part of the refinancing, was structured to minimize stockholder dilution because "we believe that equity holders deserve something after three years of heavy lifting."

At a glance

Dick Notebaert on turning Qwest around:

  Debt cut from $26 billion in 2002 to $15.5 billion by year-end.

  Revenues stabilized, costs cut, profit margins improved.

  Settlements with the SEC and largest class-action shareholder group.

Qwest
Q: NYSE
$4.62
+ 5 cents

http://rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_4223065,00.html