CPR: Qwest Shows Signs of Life
By Ken Belson New
Tuesday, November 29, 2005
Earlier this year, Qwest Communications, the smallest of the
four Bell companies, was the whipping boy of the phone
industry. The company had lost a nasty and protracted
bidding war for MCI that only highlighted its failings
compared with its larger rival, Verizon Communications.
Unlike the other Bells, Qwest does not have its own wireless
network, but relies on Sprint to provide service. Qwest is
heavily in debt and its long-distance wholesale business has
been sagging. It has also been playing catch-up in the
But lately, investors have warmed to Qwest.
Since falling to $3.57 on June 23, shares of Qwest have
jumped 45 percent, closing yesterday at $5.19. Of course,
that is still a long way from the $60 level the stock
reached before the bubble in telecommunications popped. But
the recent run-up outshines by far its Bell rivals: shares
of Verizon have declined 7.3 percent over the same period;
shares of AT&T, formerly SBC, are up 6 percent.
Indeed, it is Qwest that has given shareholders the most to
talk about. Initially, investors were relieved that Qwest
did not continue bidding for MCI. The company had raised
its offer several times to dangerously high levels given its
heavy debt load of about $17 billion. Some analysts worried
that MCI, had it been acquired, would have compounded
The company has also resolved a number of issues, most
notably a class-action lawsuit by shareholders who lost
money when Qwest's shares tumbled after accusations of fraud
at the company starting in the late 1990's. On Nov. 1,
Qwest offered to pay $400 million to resolve the suits.
Other lawsuits remain, but the company has moved to get its
balance sheet in order. This month, Qwest said it would
issue $1.1 billion in convertible bonds with a coupon rate
of 3.5 percent and use the proceeds, along with other cash,
to buy back $3 billion in bonds that pay 13 to 14 percent
The swap will help the company reduce its interest payments
by about $300 million in 2006 and raise the company's free
cash to about $1.3 billion, according to Jeffrey Halpern,
who covers Qwest for Sanford C. Bernstein & Company.
"It takes away one more layer of concern in the market about
their future," said Mr. Halpern, who has had a buy rating on
Qwest since March 2004.
Only 4 analysts out of the 26 covering Qwest have a buy
rating on the stock, according to Bloomberg.
The recent recovery in Qwest's stock provides some comfort
to Bill Miller, the money manager famous for outpacing the
Standard & Poor's 500-stock index 14 consecutive years with
his Legg Mason Value Trust Fund, which is a major Qwest
Mr. Miller, who is also chief executive of Legg Mason Funds
Management, was a loud advocate of a Qwest-MCI merger as
both an MCI and Qwest shareholder. But the turnaround in
Qwest shares that has come after losing the battle for MCI
means that Mr. Miller's fund may extend its winning streak
to 15 years. Qwest is on a streak of its own, improving its
operations, though there is no question that it remains the
smallest and weakest of the Bells. In the third quarter,
the company's loss shrank to $144 million, or 8 cents a
share, about 75 percent less than in the quarter a year ago.
Revenue grew 1.6 percent, to $3.5 billion, as more customers
signed up for long-distance and broadband services. The
company added 4,000 wireless subscribers, the second
consecutive quarterly increase.
Qwest, based in Denver, has also been cutting costs,
reducing operating expenses by 9 percent in the third
quarter, to $3.3 billion. In the last two years, Qwest has
eliminated nearly 7,000 jobs, or 14.9 percent of its work
As a result of these improvements, Qwest has "the
opportunity to cross over to profitability in 2006 and
improve our financial flexibility," Richard C. Notebaert,
the chief executive, told investors on Nov. 1.
To be sure, Qwest still has loads of problems. The company
needs more wholesale customers to fill its nationwide fiber
network. The best suitor might have been MCI, but others
have been bought, too. WilTel Communications, for instance,
was bought by Level 3 on Oct. 31.
Without a wireless network, Qwest makes less money in one of
the fastest-growing parts of the industry. Since it must
pay Sprint to use its network, it keeps less profit for
itself, unlike Verizon, which owns 55 percent of Verizon
Wireless, or AT&T and BellSouth, which own Cingular.
"They are not going to get the same benefits as Verizon,
which can lose a landline customer but still get a wireless
customer," said Todd Rosenbluth, who covers Qwest for
Standard & Poor's.
Qwest also has fewer broadband customers than its Bell
peers, Mr. Rosenbluth said. At the end of the third
quarter, Qwest had 1.3 million high-speed data subscribers,
equal to 8.7 percent of its local phone customers.
BellSouth, by comparison, had 2.7 million broadband
subscribers, or 13.2 percent of its local lines.