Qwest

(Q)

CEO Joe Nacchio may be hearing louder footfalls these days. In the wake of the Denver telco's latest

revenue shortfall, which pushed the already downtrodden stock down 11% Friday, the issue of credibility is once again at hand.

Obviously, Qwest

isn't the only phone company to see sales declines. But then again, no telco executive has thrust himself into the spotlight in recent weeks with more urgency, seeking to restore investor trust and clear up financial uncertainty. And observers say there is some sign that his efforts, however high-profile, are failing to turn opinion in Qwest's favor.

With Qwest's board starting to take a more active role in the company and the stock continuing to head south, some people say Nacchio is in the hot seat like never before. Qwest shares fell 86 cents in recent trading Friday to $6.71.

"He's been a lightning rod for the negative attention that's been drawn to the company," says Thomas Weisel Partners analyst Peter DeCaprio. "I think the market would view it as a positive catalyst if he were out."

Blindsided?

Qwest didn't immediately return a call seeking comment on Nacchio's status. Clearly, the executive has cast himself as maintaining a firm rein on the operations of his debt-heavy company, which was created in the merger of new-wave network builder Qwest with old-line Baby Bell U S West. In Thursday's conference call, for instance, Nacchio left the clear impression that he had taken charge of hiring a consultant who is publicly charged with auctioning assets, including the company's phone book business -- but who some analysts believe is setting the stage for a big merger with another Baby Bell.

Since February, Nacchio has offered investors and analysts repeated assurances about Qwest's finances, through a weekly series of conference calls and analyst meetings. And with the first few sessions taking on the feel of a pep rally, many observers were blindsided when the latest gathering revealed a projected $1 billion shortfall in 2002 revenue.

The latest disappointment has disappointed even the company's many fans on Wall Street, where no fewer than four securities houses cut Qwest's ratings or estimates or otherwise made negative comments Friday. Now the decline in the stock, which has now lost fully 83% of its value over the past year, has rekindled a familiar refrain on Wall Street that is certain to resonate at Qwest's board level: People want to hold someone responsible, and there Nacchio is front and center.

"The most important problem with Qwest right now is credibility," says a former senior executive who left U S West when it merged with Qwest.

Issues

The renewed criticism of Nacchio plays out against a backdrop of issues plaguing the company. As

TheStreet.com

has chronicled, Qwest was aggressive enough with its network capacity swaps to invite a

Securities and Exchange Commission

investigation. Amid worries about the company's ability to continue to service its $25 billion or so in outstanding debt, Qwest was shut out of the commercial paper market earlier this year, an event that forced the company to tap its entire credit line.

And though Qwest has no shortage of apparent financing options, including the sale of assets, observers point out that even the most successful cash-raising transactions won't turn around the company's plunging near-term sales trends or reverse the continuing slide of Qwest shares.

Qwest's board, particularly company founder Phil Anschutz, is said to be taking a more active role in the company and its direction. Indeed, one of the actions to follow from a recent weekend retreat at Anschutz's Colorado ranch was the hiring of Tom Middleton, who was formerly Merrill Lynch's top merger guy.

Nacchio reported Thursday during a conference call with analysts that he'd hired Middleton, lest anyone suggest he wasn't in firm command of the company. But industry observers say Middleton, who helped broker some of the biggest mergers in industry history including Qwest and U S West, is likely to be arranging a deal with another Bell -- presumably

BellSouth

(BLS)

.

Road Less Traveled?

While Anschutz and Middleton may help guide Qwest to more stability, Nacchio's fate rests increasingly in the hands of the board. As such, there may be a fork in the road ahead.

"There is no arguing that the Qwest management team has done as much damage as one could have done under the circumstances to lose the faith of securities holders," wrote CreditSights debt analyst Glenn Reynolds in a report late Thursday.

But Reynolds and others are quick to point out that underneath the controversial personalities atop Qwest is a company with valuable businesses that has a good chance of stabilizing its balance sheet through the sale of assets or convertible bonds, and eventually riding off into the arms of another Bell.

Even though Nacchio just renewed an employment contract, complete with a hefty raise, the board is under growing pressure particularly from shareholders who are loudly grousing about fiduciary responsibilities.

"To assume the directors are just going to board meetings and collecting their director fees is ridiculous," says the former U S West executive, who declined to be identified, citing a nondisparagement agreement. "That just doesn't pass the giggle test.

"We are seeing the endgame for Joe here," adds the former executive. "I think we will see a new face on top of the company this year."