Advanced Corporate Finance
University of Colorado-Boulder
Leeds School of Business
October 7, 2009
Joseph J. Euteneuer
Executive Vice President & CFO
Qwest Communications
1
Agenda
• Background / The Business Environment
• The “Street’s” Perspective
• Creating Shareholder Value
• Balanced Approach to Capital and Investing
• September 2009 Bond Offering
• Asset Strategic Review
2
Qwest’s Business
Qwest14-state Local Service Area
Qwest POPs
VoIP Deployed Cities
3
September 15, 2008
Crisis on Wall Street as Lehman
Totters, Merrill Is Sold, AIG
Seeks to Raise Cash —Fed Will
Expand Its Lending Arsenal in a
Bid to Calm Markets; Moves Cap
a Momentous Weekend for
American Finance
By Carrick Mollenkamp, Susanne Craig, Serena Ng and Aaron
Lucchetti
A1
Euteneuer to Lead Qwest’s
Finances
By Roger Cheng
B5
Qwest Communications International
Inc. hired former XM Satellite Radio
and Comcast Corp. executive Joseph
Euteneuer to serve as chief financial
officer…
The American financial system was shaken to its core on Sunday.
Lehman Brothers Holdings Inc. faced the prospect of liquidation,
and Merrill Lynch & Co. agreed to be sold to Bank of America
Corp….
4
The Business Environment Post 9/15
Total US Consumer Confidence Index: 3Q06 - 2Q10E
U.S. Unemployment Rate: 2008 - 2011E
12.0%
10.0%
100
8.0%
80
6.0%
60
4.0%
40
2.0%
0
0.0%
Source: the Conference Board and NIPA; Moody’s Economy.com
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
20
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
CC Index (1985 = 100)
120
US
Source: Bureau of Labor Statistics: Current Population Survey; Moody's Economy.com
U.S. Business Bankruptcy Filings: 3Q06 –
2010E
1.4
80,000
70,000
1.2
60,000
National
0.8
50,000
40,000
30,000
0.6
20,000
0.4
10,000
0.2
0
3Q
0
4Q 6
0
1Q 6
0
2Q 7
0
3Q 7
0
4Q 7
0
1Q 7
0
2Q 8
0
3Q 8
0
4Q 8
0
1Q 8
0
2Q 9
0
3Q 9
0
4Q 9
0
1Q 9
1
2Q 0
10
Building Permits - National (M)
Single Family Homes - Building Permits
2006 - 2010E
1.0
US last qtr view
3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
Source: Bureau of Census: Form C-404; Moody's Economy.com
Source: Office of US District Courts; Moody’s Economy.com
5
The Street’s Perspective of Q
6
6
2009 Total Qwest Guidance
2008
2009 Guidance
2009 Consensus
Revenue
$
13,475
n/a
$
12,367
External Adj. EBITDA
$
4,547
$4,250 - $4,400
$
4,351
CapEx
$
1,777
$1,700 or less
$
1,629
Normalized Free Cash Flow
$
1,439
$1,500 - $1,600
$
1,561
Qwest is on track to meet Guidance and Analyst
Consensus in 2009
7
7
7
Bank of America, David Barden – Key Points
Buy/$5.00
Positive view of Qwest is based on several factors:
1. Management focus on extracting value is a positive
2. Potential for enhanced returns to shareholders
–
Increased the probability of Qwest fully pre-funding the potential
put of its convertible senior notes in 2010
3. Expect another wave of consolidation to emerge in 12 to 18
months
4. Valuation is attractive
–
8
Qwest’s EBITDA multiple is the lowest in the sector while its ‘09E
FCF yield of 21% is among the highest
8
Morgan Stanley, Simon Flannery – Key Points
Hold/No Price Target
Investment Conclusion
• Successfully tapped the credit markets, partially addressing its
short-term maturity profile, easing concerns over its dividend
sustainability
• The company has the ability to sustain its dividend:
–
–
–
–
Substantial cash on hand
Strong cash generation
A ~$945M undrawn credit facility (as of July 29)
Capital budget flexibility
• Revenue Generating Unit (RGU) growth, and its impact on
revenue growth, is the bigger obstacle for the stock
• Without the stabilization in RGU trends, it may be harder to
attract longer-term investors
9
9
Goldman Sachs, Jason Armstrong – Key Points
Sell/$2.75
• Revenue pressure making margin gains difficult to hold
• The glimmer of hope in AT&T/Verizon results around a consumer
wireline inflection was not present at Qwest
• We still expect 2010 revenues to decline another 3.4%
• This will lead to 150 bp in 2010 margin pressure, with an
EBITDA decline of 7.4% to $4.0 bn
• Tough balancing act ahead
– Peers have invested in video, which appears to be stabilizing line
loss, Qwest line loss stepped up another 50 bp QoQ
• Comparisons versus AT&T and Verizon in consumer are likely to
become even more unfavorable given the current trajectory
• Attempts at structural value creation through monetizing certain
assets seems unlikely as shown through the recent unsuccessful
auction of the company’s backbone business
10
10
Creating Shareholder Value
Sustainable Free Cash Flow “Growth”
11
11
Shareholder Value
Theoretically how share price is determined:
Revenue – OpEx = EBITDA
EBITDA – Capex – Interest – Working Capital = FCF
FCF *Perception Value = Total Value
Total Value – Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
Increasing
Shareholder
Value
Return on
Investment
Capital
Weighted
Average
Cost of Capital
Sustainable
Free Cash Flow
Growth
The value of a company is determined by its
expected discounted Free Cash Flow
12
*Perception Value - Shorthand metric to reflect the expected Discounted cash
flows of a business, discount rate (including risk) and expected
cash flows growth.
12
Analyst Estimates for Q
Feb-09
Adj EBITDA
Bank of America
BMO
Citi
Goldman Sachs
JP Morgan
Morgan Stanley
Oppenheimer
Thomas Weisel
UBS
Wells Fargo
Analyst Consensus
Max Estimate
Min Estimate
Budget
Guidance
$
4.24 $
4.31
4.28
4.17
4.21
4.11
4.22
4.34
4.14
4.28
Adj FCF
1.49
1.39
1.42
1.33
1.44
1.36
1.40
1.43
1.32
1.65
Sep-09
Implied
Perception
Value*
12.9x
13.8x
15.9x
12.5x
12.1x
15.2x
n/a
13.1x
13.9x
n/a
4.20
1.40
13.9x
4.31
4.11
4.40
4.2 to 4.4
1.65
1.32
1.50
1.4 to 1.5
15.9x
12.1x
13.0x
Price Target
$
$
Adj EBITDA
4.00 $
4.00
6.00
2.50
3.00
4.93
n/a
3.75
3.50
n/a
Adj FCF
4.33 $
4.34
4.40
4.34
4.33
4.36
4.32
4.32
4.41
4.42
1.59
1.23
1.59
1.59
1.65
1.55
1.51
1.50
1.55
1.69
Implied
Perception
Value*
13.2x
16.4x
13.8x
10.7x
13.7x
n/a
n/a
12.9x
12.2x
n/a
4.19
4.35
1.56
13.0x
6.00
2.50
4.42
4.30
4.40
4.25 to 4.4
1.72
1.23
1.50
1.5 to 1.6
16.4x
10.7x
13.0x
Price Target
$
$
5.00
4.50
5.50
2.75
6.00
n/a
n/a
4.00
3.80
n/a
4.61
6.00
2.75
* Implied Perception Value is defined as Q Enterprise value divided by the analyst's adjusted FCF estimate
13
13
Perception Value Models
Bank of America Valuation Model
Implied
Total
FCF
x
Perception
=
Value
Value
1,591 x
13.2
=
20,942
Total
Value
20,942
Equity
Value
8,615
-
Net Debt
=
-
12,327
=
∕
Shares
=
∕
1,723
=
Equity
Value
8,615
Total
Value
17,065
Price
Target
$
5.00
Equity
Value
4,738
-
Net Debt
=
-
12,327
=
∕
Shares
=
∕
1,723
=
Equity
Value
4,738
Price
Target
$
2.75
David Barden’s Perception of Q:
Jason Armstrong’s Perception of Q:
• Confident that Q will resolve debt
towers through refinancing
• Intense revenue pressure
• Meaningful results in business
markets
• Consumer access line loss should
continue to slow as FTTN matures
14
Goldman Sachs Valuation Model
Implied
Total
FCF
x
Perception
=
Value
Value
1,589 x
10.7
=
17,065
• Views IXC auction as a positive
indication that Q is exploring value
- Large wholesale disconnects
- Mass markets pressure
intensified
• Unfavorable FTTN trajectory
• Unsuccessful IXC auction
14
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
= August 2008 (H = $4.01, L = $3.43)
15
15
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
= August 2008 (H = $4.01, L = $3.43)
16
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
= November 2008 (H = $3.38, L = $2.28)
16
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
= August 2008 (H = $4.01, L = $3.43)
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
= November 2008 (H = $3.38, L = $2.28)
= April 2009 (H = $4.06, L = $3.42)
17
17
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
18
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
= August 2008 (H = $4.01, L = $3.43)
= November 2008 (H = $3.38, L = $2.28)
= April 2009 (H = $4.06, L = $3.42)
= September 2009 (H = $3.72, L = $3.34)
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
18
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
19
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
= August 2008 (H = $4.01, L = $3.43)
= November 2008 (H = $3.38, L = $2.28)
= April 2009 (H = $4.06, L = $3.42)
= September 2009 (H = $3.72, L = $3.34)
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
19
Perception Value Sensitivity Analysis
$
$
$
$
$
$
$
$
$
$
$
FCF
1,800
1,750
1,700
1,650
1,600
1,561
1,500
1,450
1,400
1,350
1,300
20
11.4x
$ 4.76
$ 4.42
$ 4.09
$ 3.76
$ 3.43
$ 3.17
$ 2.77
$ 2.44
$ 2.11
$ 1.78
$ 1.45
11.6x
$ 4.96
$ 4.63
$ 4.29
$ 3.95
$ 3.62
$ 3.35
$ 2.94
$ 2.61
$ 2.27
$ 1.93
$ 1.60
11.8x
$ 5.17
$ 4.83
$ 4.49
$ 4.15
$ 3.80
$ 3.54
$ 3.12
$ 2.78
$ 2.43
$ 2.09
$ 1.75
12.0x
$ 5.38
$ 5.03
$ 4.69
$ 4.34
$ 3.99
$ 3.72
$ 3.29
$ 2.94
$ 2.60
$ 2.25
$ 1.90
Enterprise Perception Value Multiple
12.2x
12.4x
12.6x
12.8x
$ 5.59 $ 5.80 $ 6.01 $ 6.22
$ 5.24 $ 5.44 $ 5.64 $ 5.85
$ 4.88 $ 5.08 $ 5.28 $ 5.47
$ 4.53 $ 4.72 $ 4.91 $ 5.10
$ 4.17 $ 4.36 $ 4.55 $ 4.73
$ 3.90 $ 4.08 $ 4.26 $ 4.44
$ 3.47 $ 3.64 $ 3.81 $ 3.99
$ 3.11 $ 3.28 $ 3.45 $ 3.62
$ 2.76 $ 2.92 $ 3.08 $ 3.25
$ 2.40 $ 2.56 $ 2.72 $ 2.87
$ 2.05 $ 2.20 $ 2.35 $ 2.50
13.0x
$ 6.43
$ 6.05
$ 5.67
$ 5.29
$ 4.92
$ 4.62
$ 4.16
$ 3.79
$ 3.41
$ 3.03
$ 2.65
13.2x
$ 6.64
$ 6.25
$ 5.87
$ 5.49
$ 5.10
$ 4.80
$ 4.34
$ 3.95
$ 3.57
$ 3.19
$ 2.80
13.4x
$ 6.84
$ 6.46
$ 6.07
$ 5.68
$ 5.29
$ 4.99
$ 4.51
$ 4.12
$ 3.73
$ 3.34
$ 2.96
13.6x
$ 7.05
$ 6.66
$ 6.26
$ 5.87
$ 5.47
$ 5.17
$ 4.69
$ 4.29
$ 3.90
$ 3.50
$ 3.11
= August 2008 (H = $4.01, L = $3.43)
= November 2008 (H = $3.38, L = $2.28)
= April 2009 (H = $4.06, L = $3.42)
= September 2009 (H = $3.72, L = $3.34)
13.8x
$ 7.26
$ 6.86
$ 6.46
$ 6.06
$ 5.66
$ 5.35
$ 4.86
$ 4.46
$ 4.06
$ 3.66
$ 3.26
20
Shareholder Value
Theoretically how share price is determined:
Revenue – OpEx = EBITDA
EBITDA – Capex – Interest – Working Capital = FCF
FCF *Perception Value = Total Value
Total Value – Net Debt (Debt-Cash) = Equity Value
Equity Value/Shares Outstanding = Share Price
Increasing
Shareholder
Value
Return on
Investment
Capital
Weighted
Average
Cost of Capital
Sustainable
Free Cash Flow
Growth
The value of a company is determined by its
expected discounted Free Cash Flow
21
*Perception Value - Shorthand metric to reflect the expected Discounted cash
flows of a business, discount rate (including risk) and expected
cash flows growth.
21
Simplify our Focus to Drive Shareholder Value
Shareholder Value
Revenue
Administrative /
Operating
Expense
Capital
New
Customers
Acquisition
Cost
Shared
Support
Capital
Spending
Existing
Customers
Service
Cost
3rd Party
Payments
PP&E
Efficiency
ARPU –
Wallet
Share
Facility
Cost
Expectations
Working
Capital
Efficiency
Execution
Perfecting the Customer Experience
22
Balanced Approach to Capital and
Investing
23
23
Comparative Balance Sheet
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30,
2009
December 31,
2008
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents.................................................................
$
1,796 $
Other.................................................................................................
2,252
Total current assets............................................................................... 4,048
Property, plant and equipment—net and other..................................... 16,178
Total assets...........................................................................................
$
20,226 $
565
2,405
2,970
17,171
20,141
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term borrowings .........................................
$
Accounts payable and other..............................................................
Total current liabilities.........................................................................
Long-term borrowings—net.................................................................
Other.....................................................................................................
Total liabilities.....................................................................................
Stockholders' equity ............................................................................
Total liabilities and stockholders' equity..............................................
$
24
1,085 $
2,703
3,788
13,038
4,451
21,277
(1,051)
20,226 $
820
3,033
3,853
12,735
4,939
21,527
(1,386)
20,141
24
Balance Investment in Growth with
Returns to the Shareholder
2009 Investment and Return- $2.8B
(estimated)
In millions of dollars
$528
$549
$1,700
Capex
Dividend
Share Repurchase
Debt Repurchase
• We started paying dividends in February 2008
– The first dividend paid since 2001
• We announced a $2B stock buy back program in October 2006
– Repurchased $1.8B through December 2008
– Still have authorization to buy $.2B
• We spent $1.8B in 2008 on CAPEX
– Estimated CAPEX is $1.7B or less in 2009
25
25
Qwest Debt Maturity Schedule
$ in Millions
3,389
Unregulated QCII and QCF (pay
down) Regulated QC (re-finance)
2,168 2,151
1,900
950
Notes:
26
•
Convertible notes shown as a maturity in 2010 given investors’ put rights
•
$945 million un-drawn revolver matures in October 2010
•
Paid down $562M QCF notes due August 3, 2009
•
Information above excludes any potential pension funding starting in 2011
26
2009 – 2011 Quarterly Debt Maturity
Schedule
$2.6B in Debt maturities within
90 days –
“The Elephant”
$1,600
$1,200
$801
$800
$1,265
$825
$400
$500
$525
$403
$0
1Q10
27
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
Unregulated QCII and QCF (pay down)
Regulated QC (re-finance)
4Q11
27
So – How Do You Eat an Elephant?
In the 90 day period between Nov. 2010 and Feb. 2011,
Qwest has $2.6 Billion Debt Maturing (The “Elephant”)
$2.6 Billion
=
$.8 Billion
Combined with cash on hand and expected cash flow generation,
we need to finance approximately $800 Million to finish the meal.
28
… One Piece at a Time
28
28
September 2009 Bond Offering
29
29
Capital Markets Seize Up
High Yield Bonds ($ in billions)
Investment Grade Corporate (Non-Financial) Bonds
($ in billions)
Upcoming Annual
Maturities
Annual New Issuance
Upcoming Annual
Maturities
Annual New Issuance
$181
$165
$158
$799
$143
$112
$518
$40
03
$707
$680
04
05
Source: Citi Syndicate
06
07
08
$51
09
$62
10
$502
$505
04
05
$517
$484
$440
$71
11
03
06
07
08
09
10
11
Source: Citi
30
30
Qwest Yields and High Yield Market Issuance
 Heightened LBO Activity
 “Cheap Money” –
unlikely to return to these
levels
($ in bn)
 Current yields are
comparable to 2008
(pre-Lehman) levels
 Heavy issuance volume
9/16/08
Lehman files
for
bankruptcy
$14
3/9/09
S&P 500
2009 low
22.0%
21.255%
20.0%
$12
18.0%
$10
16.0%
$8
14.0%
$6
12.0%
$4
10.0%
$2
8.0%
8.59%
$0
6.0%
1/3/06
4/3/06
7/3/06
10/3/06
1/3/07
4/3/07
7/3/07
10/3/07
Weekly HY Issuance
1/3/08
4/3/08
7/3/08
10/3/08
1/3/09
4/3/09
8/18/09
7/3/09
YTW on QCII 7.5% Senior Notes due '14
31
September 14th – Why did Qwest launch a bond
offering?
Financing Transaction
•
On September 14th, Qwest launched and priced a $550m high yield bond offering
• Price of 98.244%, coupon of 8.0% and yield of 8.375%
Rates increase
Now
Rates decrease
Pay rate
as of 9-14
(8.375%)1
Opportunity cost could have paid
lower rate
Re-finance
decision
Rates increase
Later
Pay
higher rate
(could be 20%+)
Rates decrease
Pay
lower rate1
1
Best rate issued since 2002 is in the low 7% range
32
32
September 14th – Why did Qwest launch a bond
offering?
• Funding need
– Debt maturities in 2010/2011 that exceed FCF less dividends
• Improved market environment
– Equity and bond market were greatly improved
• S&P 500 up 54% from low of 676 on March 9, 2009 to 1,043 as of Sept. 11, 2009
• High yield market has also rallied (bond prices up and yields down)
– Qwest’s 7.5% note due 2014 trading yield improved to 8.2% (Sept.
11) down from a high of approximately 20% in December 2008
• Decision
– Raise capital now or at a later date in 2009 or 2010
• Waiting = taking a position that interest rates will fall or remain flat
• Not waiting = protection against rising interest rates
– Chance to opportunistically re-finance a portion of funding requirement (dollar cost average)
– Cost is negative carry (the interest cost on new debt raised prior to the maturity of the old
debt)
33
33
Asset Strategic Review
34
34
Introduction – Opportunity
Qwest Communications International Inc. (“QCII”)
Unregulated parent company traded on the NYSE “Q”
with a state-of-the-art nationwide fiber optic network
and advanced product offerings
Regulated Regional Bell Operating Company (RBOC)
telecom provider in 14 western states with a
significant customer base:
• Third largest local telephone company
• 10.9 million access lines
• 2.9 million high-speed Internet subscribers
• 853K video subscribers
Potential Opportunity
• Qwest received an unsolicited inquiry from a
company that was interested in purchasing assets
(property plant & equipment, customers, revenue
and employees)
• The assets in question were not a separate standalone business unit with financial statements
Qwest Corporation 14-state Local Service Area
Qwest POPs
VoIP Deployed Cities
Qwest Central Offices
1) As of Q2 2009
35
Unsolicited Offer for Assets - Summary
• Company receives an unsolicited offer from a buyer
• Corporate governance issues
– Board has a fiduciary duty to the shareholders to evaluate an
acquisition proposal
• Internal and external counsel consulted
• Meetings with management, the board of directors and
consultants / advisors
• Comprehensive review of the assets and operations undertaken
• Decision to run competitive bidding process
• Outside advisors engaged to manage process
• Evolution of offers concluded the asset was more valuable to
Qwest shareholders
• No disclosure requirement until an actual agreement is reached
36
Identify the Specific Assets – Due Diligence
Process
Physical Assets
Customer Assets
• Detailed process to
identify specifically
what physical assets
the buyer was
interested in
• Detailed process to identify
what customer contracts
and revenues would be
included in the sale
• For example: fiber in
the ground from city A
to city B, etc.
• Many lawyers reviewing
contracts
• Audited financial statements
needed to be created
Human Capital
• Detailed process to
identify the employees
that would be included
in the sale of assets
• Separation of related
assets (e.g., real
estate, PCs, e-mail
networks, etc.)
Goal is to determine what assets would be sold and, therefore, the cash flow stream that would be leaving
the company in exchange for a purchase price
37
Valuation – Value to a Buyer of Assets
Considerations
Asset Purchase
Revenue
FCF
• Buyer will estimate future
cash flows
Not actual numbers /
For illustrative purposes only
3000
2500
2,200
2,100
2,000
2,400
2,300
2000
1500
1000
800
900
1,000
1,100
1,200
• Identification of synergies
is typically a significant
value driver
• For example,
elimination of
duplicative overhead
500
0
2010
2011
2012
2013
2014
NPV (net present value) of the cash flows discounted at the company’s WACC (weighted average cost
of capital) is the value of purchasing the assets inclusive of synergy value
38
Valuation – Value of Retaining Assets
Considerations
Asset Sale
Revenue
3000
FCF
Not actual numbers / For illustrative purposes only
• Review of assets and
operations
2,800
2,600
2,400
2500
2,200
2,000
2000
1500
1,000
1,100
1,200
1,300
1,400
1000
• Sale of assets may
involve dis-synergies
• For example,
corporate overhead
allocated over a
smaller revenue base
• Separation of assets
involves transaction costs
500
0
2010
2011
2012
2013
2014
NPV (net present value) of the cash flows discounted at the company’s WACC (weighted average cost
of cost of capital) is the value of retaining the assets plus the avoided transaction costs and dis-synergies
39
Evaluation of the Purchase Offer
Consideration
• Currency utilized could be:
• Cash
• Stock
• Debt
• Commercial agreements
• Combination of the above
• Terms & conditions of contract
Execution
Risk
Financial Markets
Risk
• Time to close
• Impact to the business
between announcement
and closing
• Regulatory risk – sale
may be delayed or
blocked by the
government
• Time and cost to extract
the assets (e.g., billing
systems)
• Evaluation of the buyer’s
ability to raise financing
• Shareholder perception
of the offer
• Exposure on debt pricing
A purchase proposal can be very simple or extremely complex
40
Conclusion
•Value of retaining the assets was
greater than purchase price proposed
by the buyer
41
Conclusion
Qwest Completes Strategic Review of Long Distance Network Asset
Company Reaffirms Full Year 2009 Guidance
DENVER, June 8, 2009 — Qwest Communications International Inc. (NYSE: Q) and its Board of Directors today announced the outcome of its
strategic review of its long distance network asset.
After receiving unsolicited indications of interest from potential purchasers of Qwest's long distance network asset, the company and its Board of
Directors undertook a comprehensive review of this asset and its operations. Following this review, the company commenced a competitive bidding
process. Although there was significant interest in this process from prospective buyers, the company and its Board of Directors have determined that
the long distance network asset holds far more value to Qwest shareholders and is more strategically important to Qwest and its customers than is
the alternative of pursuing a transaction.
Qwest reaffirms its guidance for the full year 2009, expecting adjusted free cash flow to be $1.4 to $1.5 billion, full year adjusted EBITDA of $4.2 to
$4.4 billion, inclusive of an expected increase in non-cash pension and OPEB expense of $200 million, and capital expenditures of $1.8 billion or
lower.
“Qwest remains confident in its outlook for 2009 and the ability of its business to continue to perform,” said Edward A. Mueller, chairman and chief
executive officer of Qwest. “At the same time, we are committed to taking steps that will benefit our shareholders, customers and employees in every
decision we make. We have always taken a disciplined, prudent approach to assessing our business in this ever changing industry. The review we
conducted confirmed that our nationwide network is a tremendous asset and delivers best-in-class telecommunications services to businesses and
government agencies throughout the country. We are committed to serving those valued customers and remain focused on increasing shareholder
value and perfecting the customer experience."
Second Quarter 2009 Earnings Call
The Company will announce its second quarter 2009 financial and operational highlights on Wednesday, July 29, 2009, at 7 a.m. EDT. Qwest
management will host a conference call at 9 a.m. EDT on the same day to discuss the company’s perspective on the results and answer questions.
42
43