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Hold the CPR:  Qwest Shows Signs of Life          
By Ken Belson New York Times
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 broadband market.

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 Qwest's troubles.

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 interest.

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 shareholder.

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 force.

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.