An immediate cash crunch no longer threatens Qwest ( Q), but the telco's return to good health remains far from certain. Analysts say that the two-part, $7 billion sale of the Qwest Dex directories business will provide a solid short-term fix. Proceeds from the deal will help the company pay down its debt and give it a boost at the bargaining table as it seeks to amend its $3.4 billion bank credit line. The passing of the immediate threat to the Denver telco sparked a Tuesday rally in the company's beaten-down shares and bonds. But selling the highly profitable unit exacts a hefty price on Qwest, a longtime cash incinerator that only last quarter reached the black on a limited basis. Some observers wonder what Qwest might do to replace the high-margin revenue it received from Dex. Others, noting how long it took Qwest to strike a deal and the price it finally received, ask whether there are strings attached. "They are not out of the woods, but at least they have located the tree line and a path," says CreditSights analyst Glenn Reynolds. Qwest jumped 55 cents to $2.79.
Qwest's stock and bonds had been rising in anticipation of the sale. The bonds, which had been trading in the 30-cent range in recent weeks, rose above 50 cents. But trading at 50 cents to 60 cents on the dollar, the bonds are still at distressed levels, says debt watchdog Reynolds. Some analysts have cautioned that investors should remain skeptical as they ponder Qwest's prospects. Among the unanswered questions are the ongoing regulatory and criminal investigation into Qwest's accounting practices, its secret deals with rivals to quiet their opposition to long-distance approval and whether a number of network capacity swaps with other distressed telcos were legitimate or fraudulent.