Barron's Insight: No Grail for Qwest Holders
Many holders of beleaguered Qwest Communications International hope that the Denver company eventually will be taken over. But even that might not give them much cause for celebration.</br></br>Qwest's main business, wireline phone service in 14 Western states, is in serious decline, and Qwest hasn't established much of a wireless presence. The lack of a "bundled" strategy makes it hard for Qwest to add new customers and keep old ones. And although Qwest has no earnings or dividend, it's one of the costliest regional Bell operating companies based on one key financial measure, enterprise value. Consisting of stock-market value plus net debt, this stands at 6.1 times earnings before interest, tax, depreciation and amortization -- versus 5.4 times for SBC Communications and 4.9 for BellSouth recently.</br></br>Another problem: Qwest, formed in 2000 from the marriage of fiber- optic telecom network Qwest and Baby Bell USWest, has been hurt by the legacy of past accounting practices that are the subject of continuing criminal probes.</br></br>Qwest has a staggering $16 billion of debt, even after reductions under new CEO Richard Notebaert. That's "going to sap a lot of free cash flow for a long time," says John Heinlein, a portfolio manager with Towson, Md., money manager Horan & Associates, who sold a Qwest position in the first quarter.</br></br>Qwest stock is below $4, down from $66 before the telecom bubble burst four years ago. Though Mr. Notebaert, former chief of Ameritech, has mounted a gallant turnaround effort, the stock has slid 25% since he arrived two years ago. "Qwest equity appears to us as barely more than an option, and an expensive one at that," Richard G. Klugman of brokerage firm Jefferies & Co. wrote in a research note. He has a price target of $2.