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Shares of the Denver-based telecom are down 20 percent since the beginning of the year. Are they undervalued?

By Andy Vuong
The Denver Post

The telecommunications sector has taken a beating from the markets so far this year, and Qwest has been among the hardest hit.

The Denver company's stock, which fell 11 cents to close at $5.56 Thursday, is down 20 percent for the year and is trading at a two-year low.

The Dow Jones Telecommunications Titans 30 Index, which includes Qwest and 29 other large-cap telecom stocks, is down 5.8 percent for 2008.

Soleil Securities Group upgraded Qwest stock this week, saying it believes the shares are undervalued despite concerns about the company's high debt load and stalling revenue.

"Is it undervalued? Yeah, in the long term," Janco Partners analyst Donna Jaegers said Thursday. "But could it go lower? Yeah, and I think it will."

Many U.S. telecom stocks were hammered last week after industry giant AT&T told investors it was seeing a decline in its consumer home-phone and Internet businesses.

Jaegers said Qwest stock would have to drop further for the company to potentially attract buyout interest from private equity or another telecom firm.

Qwest missed out on the widespread industry consolidation over the past few years that gobbled up potential merger partners such as MCI, which was acquired by Verizon Communications. One company that has been floated recently as a potential partner is Canadian wire-line and wireless phone operator Telus.

Telus considered merging with BCE, the parent company of Bell Canada, last year before BCE agreed to be acquired for $33 billion by a private-equity-backed consortium. According to its job listings, BCE is looking to expand operations in Denver, Phoenix, Albuquerque, Seattle and Portland, Ore. - all Qwest markets. BCE has 100 job openings for field engineers in those markets.

"If Qwest sinks to an 8 percent (dividend) yield or so, then you'd have private equity or maybe Telus looking at them," Jaegers said.

To reach a dividend yield of 8 percent, Qwest stock would have to fall to $4 a share. The company's recently reinstated dividend amounts to 32 cents annually and has a yield of about 5.8 percent based on Thursday's closing price.

Qwest has a policy of not commenting on speculation.

Buyout more difficult now

David Novosel, a telecom analyst with bond-research firm Gimme Credit, said he would be surprised if Telus acquired rural land lines in the United States.

"Telus has really relied on wireless as their growth vehicle," Novosel said. "I would anticipate that that's where they would get more of their growth going forward."

Some analysts speculated last summer that Qwest could be a leveraged-buyout candidate after years of reducing debt and growing cash flow. The company's stock was hovering around $9 at the time, and one estimate priced a potential deal at $34 billion.

Even with Qwest stock down about 40 percent since then, a leveraged buyout at this point would be tough partly because of the economic slowdown, said Tad Kelly, a managing partner with private-equity firm CHB Capital Partners.

"The environment on the financing side of LBOs for larger deals has been dramatically and negatively impacted since last summer, so it makes it harder to do big deals like Qwest," Kelly said.

Qwest has about $14.5 billion in debt and $1.1 billion in cash. The company generated about $1.4 billion in free cash flow in 2006 and forecasts that figure to grow by as much as $400 million for 2007, said Qwest spokeswoman Diane Reberger. Qwest will announce fourth-quarter and full-year results for 2007 on Feb. 12.

Andy Vuong: 303-954-1209 or avuong@denverpost.com