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
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
"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
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
"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
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