Ovum on Qwests Conundrum: Buy or Sell?

The nation’s third-largest phone company, Qwest Communications International Inc. (Q), is struggling. And with recent debt restructuring and call center closures, analysts think the company is continuing to make itself more attractive as a seller, although, if it plays its cards right, perhaps even as a buyer.

Early this month, the Wall Street Journal broke the story that Qwest is considering selling its long-haul network, a move that would remove the carrier from the out-of-region and government business. This week, research firm Ovum wrote that if Qwest were to do that, “most of what remained would resemble the original US West, a local exchange carrier serving 14 sparsely populated western states.”

And therein lies Qwest’s conundrum. Most of the carrier’s revenue is realized through the long-haul network, but there also are billions of dollars in debt to pay.

Over the next three years, Qwest has $5.1 billion in obligations coming due – this year alone the company must write a check for $792 million. Getting rid of the network would dent the debt by about $3 billion, analysts say. The hard part is that Qwest is making money from the long-haul network, and selling it would mean the end of that sales pipeline. In 2008, the mass-markets business created 43 percent of Qwest’s revenue, wholesale brought in 24 percent and large-business netted 30 percent.

So, if Qwest sold that long-haul network, it would become “a shell of a local exchange carrier with very few major markets,” said Ovum analyst Paris Burstyn. “It would lack the critical mass of customers and assets needed to generate the capital to upgrade its remaining facilities to continuously broaden its service portfolio into wireless or video services.”

Worse, a long-haul sale “would create insurmountable problems for Qwest’s long-haul future and start a sell-off slide,” Burstyn wrote.

Therefore, the answer from Ovum’s perspective is for Qwest to follow Level 3 Communications Inc.’s (LVLT) lead: Continue restructuring and paying down debt “so that it can regain control of its destiny, hold onto its network, focus on its core customers and business lines, and continue to compete effectively.”

In other words, don’t sell your cash cow, your golden goose, your silver spoon.

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