One Big Qwestion Mark

After losing MCI to Verizon, CEO Notebaert has to shift strategy

A day after dropping out of a bruising two-month battle to snatch MCI Inc. (MCIP ) from a merger with Verizon Communications Inc. (VZ ), Qwest Communications International Inc. (Q ) Chairman and Chief Executive Richard C. Notebaert quickly set out to reassure investors that his company's outlook was sunny. "A beautiful day here in Denver," Notebaert began a May 3 conference call. "You can see the mountains. It is clear."

Notebaert may have a great view of the Rockies, but truth is, the future of Qwest is a lot less clear. The 57-year-old telecom veteran has limited options, and none of them look very promising. Qwest's problems are myriad: It lacks a wireless company, its money-losing fiber-optic network -- short on business customers -- is hugely underutilized, and it continues to lose customers in its traditional residential phone business. Whether Notebaert attempts to expand Qwest, or shape it up for a sale, the company's $17.3 billion total debt load and weakened market position make either strategy a Herculean task.

Investors are already coming to that conclusion. Qwest's stock price is down more than 15% since the takeover battle began in mid-February, vs. a 2% decline for the Standard & Poor's 500 Telecom Services Index. Though Notebaert has significantly trimmed Qwest's losses, he's hardly out of the woods. Excluding a one-time gain of $257 million from asset sales, Qwest lost $180 million in the first quarter on sales of $3.4 billion, a 1% drop. "They don't have any clear exit plans or alternatives," says Timothy Gilbert, a telecom analyst at Principal Financial Group. "They become less and less relevant in the telecom universe."


Notebaert, of course, sees it differently. "Strategically, there are a lot of opportunities in our sector," he told investors on May 3. He sees his best shot in revamping Qwest's fiber-optic network business. Built to serve businesses with high-speed data services, it lost $200 million in the first quarter. Acquiring MCI had been key to Notebaert's plans, since filling the network with MCI's corporate clients would have eliminated those losses. So Notebaert has now shifted back to his original strategy -- looking for smaller telecom outfits to beef up Qwest's traffic.

So which companies could Qwest buy now? Last year, Notebaert lost a lower-profile bidding war for Allegiance Telecom, a bankrupt provider of telecom services to corporate customers. Donna Jaegers, a telecom analyst at Janco Partners Inc. in Englewood, Colo., says the winner of that fight, the $1.3 billion-in-revenues XO Communications Inc., might now be a target for Qwest. So would Time Warner Telecom Inc., a $700 million-in-revenues offshoot of the big media company; it too provides telecom services to businesses.

Notebaert will also press the Justice Dept. and the Federal Communications Commission to require SBC Communications Inc. (SBC ) to divest some network assets before approving its acquisition of AT&T. He'll likely do the same with Verizon and MCI. That could give Qwest better access to business customers in cities such as New York or San Francisco. Even if all these steps only got Qwest's fiber-optic network to the break-even point, that might be enough. Qwest could then begin to pay down its huge debt load with cash flow from its profitable local phone unit.

That may be Qwest's best hope. A sale of the company's fiber-optic network to a "super carrier" such as SBC/AT&T, Verizon/MCI, or Sprint Corp. isn't likely. They all have extensive networks, and Qwest wouldn't add enough revenue to justify a deal, figures Jay E. Pultz, a telecom analyst at Gartner Inc. At the right price, Pultz figures, BellSouth Corp., might be interested, although it says it doesn't have any acquisition plans. But private-equity firms might make Qwest an offer it can't refuse. They could recapitalize the balance sheet and sell its fiber network, leaving Qwest as a slow-growing, cash-generating local phone provider. Avoiding that fate will take some fancy footwork on Notebaert's part.

By Christopher Palmeri in Los Angeles and Brian Grow in Atlanta

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