Qwest faces life after MCI, says making progress on debt

By Paul Deckelman

New York, Feb. 15 - Now that MCI Inc. has decided which regional Bell operating company it wants to spend its future with - and it's not Qwest Communications International Inc. - the latter company will go back to doing what it was doing before the MCI soap opera came to dominate telecommunications industry headlines: keep trying to improve its revenues, reduce its costs of doing business, cut its debt and better its free cash flow.

Rather than waste time mooning about what might have been, Qwest will essentially put the MCI interlude behind it and move on.

That seemed to be the upshot of the Denver-based telecommunications company's conference call following the release of its fourth-quarter earnings results Tuesday.

Predictably, Qwest's failed bid to acquire MCI was on the minds of some analysts on the call, since the release of the earnings and the conference call followed by just a day MCI's announcement Monday that it will accept Verizon Communications Inc.'s $6.746 billion cash-and-stock merger offer rather than Qwest's offer, which was reportedly increased to $7.3 billion in cash and stock from $6.3 billion originally.

Richard C. Notebaert, Qwest's chairman and chief executive officer, seemed to almost wax philosophical when questioned repeatedly about what Qwest's "next move" would be.

He told one questioner that it "doesn't serve any useful purpose" to comment on that, beyond saying that the boards of both Verizon and MCI have voted their approval of the merger plan, and that would appear to be that.

The Qwest chairman clearly believes that the final bid his company put forward was "very strong," and leaving out the equity component, "it appeared that over $1 billion was left on the table by the MCI board" by accepting the lower Verizon offer.

According to some news reports Tuesday, some large MCI shareholders may feel the same way, raising the possibility they could reject the Verizon offer - although the general consensus in the financial community seems to be that Verizon's overall strength, compared with Qwest's relative lack of same, still makes the Verizon bid more attractive, even if it is half a billion-dollars lower (on a per-share basis, $20.75 per MCI share for the Verizon bid versus the Qwest bid's estimated value at $24.60). That, then, would make the scenario of MCI shareholders nixing Verizon and giving Qwest a second chance to slip in the back door a long shot at best.

"A lot of opportunities"

While saying that Qwest would "keep its doors open" and would "evaluate its options," Notebaert said basically that "we'll just have to see how it unfolds. From where we sit, there are a lot of opportunities. Lots of things could unfold in the months to come."

The statement seemed to indicate that rather than coming back and trying to specifically top Verizon - a difficult task, since according to news reports, the offer MCI rejected in favor of Verizon's was already larger - Qwest would instead look for opportunities as the wave of consolidation that has hit the telecom industry, including Verizon-MCI and SBC Communications Inc.- AT&T Corp., produces asset divestitures it might be able to capitalize on.

The Qwest CEO predicted that agencies like the Justice Department will pose "some real anti-trust questions, as well as regulatory. We don't know what it will look like coming out and what those opportunities are.

"It's also possible that there will be opportunities for us, as people divest certain assets or certain customer lists, that maybe we could be a recipient of that and maybe that would help the competitive nature of the markets going forward...I think there's lots of opportunities for us.

"We need to continue down the path that we have been," Notebaert declared, "which is very focused. We aren't everything to everybody. There are certain areas like IP [internet protocol] and data, small and medium-sized businesses that are really targets for us. The large companies, of course, are opportunities, but I think our success will be in the small-to-mid-sized companies."

Reducing debt

It was widely assumed that Qwest, struggling to pare down a $17 billion debt load, wanted to acquire MCI in order to use some of the latter's estimated $5.5 billion of built-up cash and its cash-generation ability going forward to bring down some of that company-choking pile of debt. Now that the MCI acquisition is not going to happen, Qwest will have to look elsewhere.

Qwest's chief financial officer, Oren Shaffer, said that had the combination with MCI occurred, "the real improvement to the leverage would have come from improved operations. And of course, in our case, we've continued to improve operations," with more than $2 billion in costs taken out of the business in the past two years alone, by means of facilities consolidation, headcount reductions and the like. "So, on our balance sheet, we're going to continue the same program we're on" - MCI or no MCI.

Shaffer said that Qwest recorded $428 million of free cash flow in 2004, before $311 million of payments made in the fourth quarter as the first installment on monies Qwest agreed to pay the Securities and Exchange Commission to settle allegations of accounting irregularities that have dogged Qwest over the past few years.

"Free cash flow improved this [past] year through continued cost management and balance sheet improvements," he proclaimed. "We continued to make solid progress in improving our financial flexibility and reducing debt."

The company managed to cut its net debt for 2004 to $15.3 billion, a reduction of $225 million from a year earlier. The total debt load stood just north of $17 billion, partly offset by a year-end cash balance of $1.8 billion and some $200 million of investments.

Interest expense totaled $366 million for the fourth quarter and $1.5 billion for the year, representing a savings of some $250 million for the year, excluding $22 million of issuance fees associated with the early repayment and termination of the company's credit facility in the first quarter of 2004.

Qwest will further shore up its balance sheet when its previously announced deal to sell its wireless assets - to Verizon, ironically - a deal that will yield gross proceeds to Qwest of $418 million. Shaffer said the deal had received the necessary regulatory approvals, and "should be completed shortly."

"We will," he said, said, "continue to focus on further opportunities to improve our balance sheet and financial flexibility."

During the quarter, Qwest posted a net loss of $139 million (8 cents a share), considerably narrowed from $407 million (23 cents a share) in the year-ago quarter.

Qwest's revenue was $3.4 billion in the quarter, a 0.3% decline sequentially and a 1.7% decrease from the fourth quarter 2003 - but that was the lowest year-over-year decline in the past eight quarters.

"A pretty good swing at the ball"

"We are pleased with the progress we have made in 2004 and we like the momentum we have entering 2005 to drive additional growth in our key lines of business," Notebaert said.

The CEO noted that "a couple of years ago, a few people thought that we may not have survived '02 - and here we are today, stepping up to the plate, and I think we took a pretty good swing at the ball [in bidding for MCI]. We'll continue to look at opportunities and take some strong swings at the ball.

"So if you look at where we were, compared with where we're going, one has to stand back and according to the media, they were kind of shocked that we stepped up to the plate and took the kind of swing that we did, with multiple proposals.

"The one thing that comes out of this is, we may be small - but by gosh, we've got a little feistiness to us and we're willing to take a run at something."

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