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
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
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
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
Debt cut from $26
billion in 2002 to $15.5 billion by year-end.
costs cut, profit margins improved.
the SEC and largest class-action shareholder group.
+ 5 cents