Notebaert's notice a shocker
Announcement concerns analysts, deflates stock
By Andy Vuong
Tuesday, June 14, 2007
Qwest chairman and chief executive Dick Notebaert's announcement Monday that he will retire as soon as the board finds a replacement shook investors and analysts.
Qwest stock tumbled 8 percent, and analysts voiced concern about the pending departure of the man who brought one of Colorado's largest corporations back from near-bankruptcy over the past five years.
The search for a new leader, who analysts say will likely be tapped from outside the company, comes as Qwest faces intense competition from cable firms. The company, one board member says, is in talks to possibly acquire another firm, and some analysts speculate that Qwest itself could be prime for a leveraged buyout.
Notebaert told the board of directors of his decision Friday and agreed to stay until the company finds his replacement. Over his five years of service, Notebaert will have earned about $103 million in total compensation, counting salary, bonuses and stock sales.
"We tugged and pulled to try to keep him a little longer," said Qwest board member Frank Popoff. "But you have to respect a man's achievements, and you have to respect a man's volition in terms of what the next chapter in his life is."
Notebaert, 59, said he wanted to spend more time with his family and focus on other commitments.
"I would not walk away if I didn't feel the legacy that I left behind was very strong," Notebaert said Monday at an investors conference in New York.
Over the past two months, the company's top three executives have retired or announced plans to retire - former chief financial officer Oren Shaffer left in April, and executive vice president of operations Barry Allen said last week he would retire at the end of this month.
Notebaert's announcement surprised many analysts.
"We view this as a negative for the company given the track record that he's had there," said Standard & Poor's analyst Todd Rosenbluth. "We think whoever the new CEO is going to be is going to face challenges even despite the efforts of what Dick has brought to the table given the competitive landscape."
Rosenbluth said the new CEO will have to decide whether to increase capital expenditures and roll out a broad video initiative to better compete against cable companies. Such a move would eat into the profits and cash flow that have helped provide a boost to Qwest stock in recent quarters.
In the face of criticism from some analysts, Notebaert has chosen not to invest heavily in video, instead reselling satellite- TV service from DirecTV through much of its 14-state local phone service territory.
Morgan Stanley analyst Simon Flannery said it is "highly unusual to see three senior executives step down in the space of two months."
"We advise investors to take profits in Qwest at these levels," Flannery wrote in a research note. "A change in leadership at the company paired with insider selling suggests that visibility is less robust."
Qwest founder Philip An schutz has shed all but four of his Qwest shares under complex forward-sales agreements over the past year. Notebaert, Shaffer and Allen have also recently exercised and sold stock options.
Speculation has swirled in recent months about a possible leveraged buyout of Qwest, and Bank of America analyst David Barden said the sweep of senior management may encourage such a move.
"We believe private equity or strategic buyers could be attracted to Qwest by the ability to place senior leadership and set the tone of the company," Barden wrote in a note.
Popoff said Monday that Qwest is "anxious" to grow and is looking at opportunities to acquire another company.
"The bottom line is there are opportunities, and we're going to be in the deal flow as things continue to evolve," Popoff said.
He said the board has hired a consulting firm to help with the search for a CEO and will "cast the net as widely as possible."
"It's an industry that has been consolidating," Popoff said. "There are probably some really good people available. We'll look internally and externally."
According to analysts, some candidates include former BellSouth chief operating officer Mark Feidler, Alltel chief executive Scott Ford and former Avaya chief executive Don Peterson.
Internally, analysts point to Dan Yost, Qwest's executive vice president of product management.
Tom Richards, Qwest's executive vice president of business markets group, could also be a prospect. Richards was the only member of the senior management team to receive individual recognition from Notebaert during the company's recent annual stockholders meeting.
Notebaert replaced former Qwest CEO Joe Nacchio in June 2002 amid an accounting scandal, massive financial losses and much uncertainty about the company's future.
Under Notebaert, the company restated $2.5 billion in revenue booked from 2000 to 2002, pared its debt from more than $26 billion to $14.9 billion and has returned to profitability.
In April, Nacchio was convicted on 19 counts of illegal insider trading involving his sale of $52 million in Qwest stock during the time he was CEO.
Qwest has posted profits for five straight quarters, mainly through cost cuts and growth in high-speed Internet subscribers. The company's workforce has been cut from 56,000 to about 38,000 during Notebaert's tenure.
Asked last week by The Denver Post about his future with Qwest after Allen and Shaffer's retirements, Notebaert responded: "It's not about me."
Qwest stock closed Monday at $9.36, down 81 cents.