The Association of U S West Retirees



Qwest Buyback Disappoints Investors
By Peter Svensson, AP
Saturday, October 14, 2006

NEW YORK (AP) - It's not easy being Qwest.

After making a remarkable recovery from the brink of bankruptcy, the phone company last week announced it would reward its shareholders with a buyback.

The result:  a drop in its shares.  And this week, its founder and largest shareholder entered a deal to sell much of his stake.

The Denver-based company had been saying for a while that it was time to reward shareholders, but when the reward turned out to be a $2 billion stock repurchase over two years rather than a dividend, investors were disappointed.

Shares of Qwest Communications International Inc., which is the main phone company in 14 mostly Western states, closed at $8.28 on the New York Stock Exchange, up 1 cent on the day but down 42 cents, or 4.8 percent, since the buyback was announced.

The move announced on Oct. 4 was generally welcomed by analysts.  Prudential analyst Richard Klugman noted that $2 billion would buy back 12 percent of the company's shares, but he would have preferred to see a combination of a buyback and a regular dividend.

"A dividend would have given investors more confidence in the sustainability of current levels of free cash flow," said Christopher King, a Baltimore-based analyst at Stifel Nicolaus.

In contrast to a regular dividend, the buyback program lets the company choose when and how much to spend on its shareholders.

Qwest's largest peers, Verizon Communications Inc. and AT&T Inc., have sizable regular dividends.

Still, Qwest's shares have still done very well this year:  they're up 47 percent.  In a longer perspective, they've done even better, as they're now worth more than seven times as much as they were at their low in 2002, when the accounting scandal compounded the damage of the burst Internet bubble.  CEO Joseph Nacchio, now on trial for insider trading, was replaced by Dick Notebaert, who has reined in costs.  After years of losses, the company has posted two profitable quarters this year.

"The management team has done an exceptional job," King said.  However, he believes the long-term prospects of the company are questionable.

AT&T (which is buying BellSouth Corp.) and Verizon are riding high thanks to their cellular arms, which are compensating for the decline in fixed-line subscribers experienced by all phone companies.  Qwest doesn't have a wireless network, but it does resell Sprint Nextel Corp.'s service under its own brand.

AT&T and Verizon are also investing in fiber-optic lines to offer television and ultra-high-speed Internet service.  Qwest has lacked the cash to follow that lead.  It also sold off its directories publishing business, a stable and profitable sideline for phone companies, in 2002 and 2003 to raise cash.

Qwest corporate and long-haul data business has suffered from declining prices.

"Long term, it's very difficult for me to see where the organic growth is going to be coming from," King said.

A move by company founder Philip Anschutz this week was hardly a vote of confidence.

The billionaire made a deal with Credit Suisse Group to sell 80 million shares.  He doesn't have to deliver the shares until 2009 and 2010, but will receive an upfront payment of $562.4 million and may receive additional payments if the shares rise, according to a filing with the Securities and Exchange Commission.

Anschutz's spokesman said the deal showed a continued confidence in Qwest and its management team.

The deal does give the seller some chance to profit from appreciation, but also hedges against a drop in the share price.

A recent study by professors at the Stanford Graduate School of Business, the University of Georgia and the University of Oregon found that so-called prepaid variable forward transactions by insiders systematically follow strong company performance and precede a decline in share price.

Anschutz, who also has interests in oil, railroads and entertainment, owns about 300 million shares, or 16 percent, of Qwest.  The sale represents 26 percent of Anschutz's holdings in the company.