Qwest sells directory unit for $7.05 billion

Qwest Communications has taken a big step toward avoiding bankruptcy, announcing today it has reached an agreement to sell its directory business for $7.05 billion.

The unit, also known as QwestDex, is being bought by a new partnership formed by private equity firms The Carlyle Group and Welsh, Carson, Anderson & Stowe.

Due to the differing regulatory requirements involving directory publishing in Qwest states, the sale will be completed in two stages. The first will cover the directory businesses for Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota. This stage is expected to close in the fourth quarter and is valued at $2.75 billion.

The second phase, which includes Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, is valued at $4.3 billion and should close some time in 2003. It is contingent upon regulatory approval and the buyer’s ability to secure additional equity financing.

The sale of QwestDex has been in the works for most of the year, as Qwest has struggled to meet and renegotiate financial covenants and find a way to pare down its $26.5 billion debt load. Qwest will use the proceeds to pay down some of this debt and to meet “other company funding requirements.”

According to a note from Michael Bowen, principal at SoundView Technology Group, the sale could reduce Qwest’s debt load to $20.5 billion. While certainly a positive, given Qwest’s guidance for earnings before interest, taxes, depreciation and amortization (EBITDA), that would not be enough to keep the company from violating its four-to-one EBITDA-to-debt ratio, which goes into effect in the fourth quarter as outlined in its bank covenants. Qwest, then, will have to renegotiate these credit facilities to give it more breathing room.

The company, in fact, has already announced that bank negotiations are underway, and according to a Qwest spokesman, today’s announcement could make these discussions easier. “I think that our banks will look upon [the sale of QwestDex] favorably. We do continue to negotiate with out banks.”

Still, however, worries about the negotiations and other issues facing the company lead Bowen to advise investors to stay away from Qwest stock. “We remind investors that Qwest is currently under investigation by the SEC and the Justice department and has previously announced that it intends to restate its financial results for all of 2001 and the first half of 2002 once its auditors have completed its final review,” he said in the note.