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First Global Crossing, then Worldcom, now Qwest — can Level3 be far behind?

-Ian.

—— http://www.forbes.com/2002/02/15/0215qwest.html Telecommunications Qwest’s Two Halves Make A Hole Mark Lewis, Forbes.com, 02.15.02, 12:40 PM ET

Qwest Communications International’s business is composed of a half-full glass and a half-empty glass that theoretically add up to a full-to-the-brim convergence cocktail.

For investors still optimistic about broadband’s potential, the half-full glass is Qwest’s (nyse: Q – news – people) long-haul fiber network and the half-empty one is its Baby Bell local-service business. For investors who are more pessimistic about broadband, the equation is reversed. Either way you look at it, the two halves of Qwest’s business do not add up to anything that impresses the market–at least not these days, in the wake of Global Crossing’s (otc: GBLXQ – news – people) bankruptcy.

Actually, “halves” is too simplistic, since Denver-based Qwest has a wide range of telecommunications businesses beyond the fiber network and the old U.S. West local-service business. But those are the two primary components as far as investors are concerned. Qwest is a hybrid: an emerging long-haul carrier like Global Crossing and Level 3 Communications (nasdaq: LVLT – news – people), and also the smallest of the four remaining Baby Bells, providing local service in 14 states, mostly in the Rocky Mountain and Pacific Northwest regions.

Qwest, in short, can present itself as all things to all telecom investors: a nimble upstart or rock-solid incumbent, an aggressive convergence play or a safe, traditional carrier with steady revenue. This made for an appealing story, which helped keep Qwest from tumbling to the inky depths during the current telecom meltdown. As recently as Jan. 24, Qwest closed at $13–far below its 52-week high of $41.86, but far above some of its long-haul rivals, which were flirting with penny-stock status.

Then on Jan. 28, Global Crossing declared bankruptcy. This Bermuda-based long-haul carrier subsequently became the subject of a probe by the U.S. Securities and Exchange Commission, which soon was asking Qwest to supply documents relating to its transactions with Global Crossing. Qwest shares fell below the $10 level on Feb. 4.

Chairman Joseph Nacchio temporarily arrested the stock’s slide on Feb. 5 when he announced plans to reduce the firm’s long-term debt by up to $2 billion. But news stories began appearing that accused Qwest of overly aggressive accounting, à la Global Crossing. The firm vigorously rebutted these accusations, but the cloud hanging over Qwest grew darker, and soon it found the commercial-paper market closed to it. Qwest this week tapped its bank credit facility to meet its short-term obligations, which apparently prompted Standard & Poor’s to downgrade Qwest’s debt yesterday. Today Qwest shares fell below $7 in morning trading, amid continued investor concerns that many formerly high-flying telecoms may have used Enron-style accounting tactics in recent years to keep their share prices aloft.

On a conference call yesterday with reporters and Wall Street analysts, Nacchio put as good a face as he could on the situation. Using Qwest’s bank credit to pay off its commercial paper “takes us out of the need to worry about day-to-day fluctuations in the commercial-paper market,” he said, as quoted by Reuters. “Liquidity is not a concern for Qwest.”

Nacchio also reiterated his intention to reduce Qwest’s long-term debt, currently $24.9 billion, by issuing new shares or convertible securities, or by selling off assets. “We don’t think we need to do more than [$1.5 billion to $2 billion] to get to the kind of investment grade we’re comfortable with,” he told the analysts.

Investors clearly remain uncomfortable with Qwest, since the stock continued its swoon today. In troubled times, when the market is nervous, a hybrid firm like Qwest may simply present too complicated a story for some investors to tolerate, especially when that firm is about to shed some unspecified assets that could change the delicate balance of its equation. Qwest for years has been billed as a holy grail for telecom investors, overflowing with new-economy growth and old-economy security. But these days, not even an optimist would claim that Nacchio’s cup runneth over.

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