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Qwest: Trying to Stay Liquid in a Dry Season


On June 4, when Denver-based Qwest Communications International Inc. (Q) gathered its shareholders at a branch office in Dublin, Ohio, Chairman Joseph P. Nacchio found himself in the crosshairs. One after another, angry shareholders rose to vilify Nacchio for Qwest's flagging earnings and his lavish executive compensation package--not to mention investigations by the Securities & Exchange Commission into alleged accounting gimmicks. The remedy, in the minds of many: Nacchio should go.

But the 52-year-old former AT&T exec, known for his combative nature, hardly looks like he's preparing to leave. To avoid bankruptcy, Nacchio has put Qwest's lucrative Yellow Pages business on the block. The Yellow Pages were part of a June, 2000, deal to merge with local telephone giant US West Inc. in a deal then valued at $46 billion. And more sales of former US West assets may be coming, including the company's wireless business and some of its rural telephone lines. By making these divestitures, Nacchio is betting the asset sales will buy him enough time and liquidity to turn around Qwest's money-losing fiber-optic network and transform it into a growing business.

That's a radical bet these days, as investors, distressed over an 85% decline in Qwest's share price in the past year, have all but given up hope. Their experience has been mirrored throughout the telecom sector, with its vast excess capacity of fiber-optic networks. "We see minimal growth opportunities for this business over the next few years," says Lehman Brothers Inc. telecom analyst Blake Bath. He thinks Nacchio's best bet would simply be to merge Qwest with another fiber-optic network or a Baby Bell.

That's the furthest thing from Nacchio's mind. He has continued to build out his fiber-optic systems, which provide high-speed Internet access and other services to large companies. That has doubled the company's debt, to $26.5 billion, over the past three years, even as sales of many of its services shrank. With pricing cut to the bone because of sluggish demand for corporate data services, Qwest's fiber-optic network revenues are expected to fall 20% this year, to $4 billion. Losses should top $400 million. Overall, the company is still seen generating $6.4 billion in cash flow, but interest on debt and capital expenditures should eat up nearly all of it. And $3.4 billion in bank debt that will come due next May could prove tough to refinance.

Moreover, though Qwest's network is largely complete, it still needs to spend about $500 million to maintain the facilities and add new customers. "In order for them to continue as an ongoing business, they have to [invest] an enormous amount on capital spending," notes Paul Wright, a telecom analyst at Loomis Sayles & Co. in Boston. "I don't see how they are going to do it."

Nacchio's answer: Sell big chunks of US West to raise the cash he needs. When Qwest merged with US West, Nacchio was criticized for diluting the fast-growing revenue stream of the fiber-optic network business with the slower-growing local phone business. Now, US West is Nacchio's lifeline. The Yellow Pages operation is expected to fetch $8 billion, while Qwest's wireless business could bring upwards of $2 billion. Selling 10% of the company's 17 million local phone lines could generate $2 billion to $3 billion more.

Will that be enough? Despite a roomful of angry investors, Nacchio is sticking to his guns. He had better hope they give him enough time to prove he's right. By Christopher Palmeri in Los Angeles


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