Qwest Takes a Step Toward Recovery

Qwest ( Q) answered Wall Street's most pressing question, but the debt-saddled telco still faces a steep climb to recovery.

The company agreed Tuesday to sell its slow-growing but highly profitable yellow pages unit for $7 billion to a leveraged buyout group led by the Carlyle Group and Welsh Carson Anderson & Stowe. The sale closes a protracted sale process that Qwest had targeted for completion earlier this summer.

The two-stage deal will bring the company some $2.75 billion by the end of 2002, easing fears that Qwest will run out of money this year. But the price tag on the deal is at the low end of the range Qwest had announced, setting the cash-strapped company up for a repeat next year of its 2002 liquidity nightmare. Even after an early Tuesday rally that pushed the stock 30% higher, Qwest shares remained 87% below their high point of a year ago.

Qwest at one point estimated that bids for the directories business could reach $10 billion. But as Qwest grappled with a host of regulatory and criminal investigations amid a steady erosion of telecom-industry economics, potential buyers increasingly came to see the company as a panic seller, pushing down the price for the business. And even with a sale in hand, Qwest investors continue to confront a number of weighty issues.

For one, the company has said it will need to restate earnings over the past three years by at least $1 billion to eliminate its aggressive booking of so-called optical-capacity swaps. Analysts say any restatements are likely to put the company in trouble with its lenders, who specified in Qwest's debt covenants that its borrowing not exceed its cash flow by a certain multiple. But with Qwest's business declining and the company facing the prospect of reducing already reported numbers, coming talks with lenders hardly seem likely to be easy.

For another, even with some cash in the bank, the company faces a huge chore in repaying debt next year, when some $4.6 billion comes due. And with the company having sold the lucrative directories unit, ongoing cash flow will be even less robust than it has been in recent periods.

More from Technology

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Some Companies Are Already Feeling the Effect of GDPR

Some Companies Are Already Feeling the Effect of GDPR

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

60 Seconds: What the Heck is GDPR?

60 Seconds: What the Heck is GDPR?