1 advanced corporate finance university of colorado-boulder leeds school of business october 7, 2009...

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Advanced Corporate Finance University of Colorado-Boulder

Leeds School of BusinessOctober 7, 2009

Joseph J. Euteneuer

Executive Vice President & CFO

Qwest Communications

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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

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Qwest’s Business

Qwest14-state Local Service Area

Qwest POPs

VoIP Deployed CitiesVoIP Deployed Cities

Qwest14-state Local Service Area

Qwest POPs

VoIP Deployed CitiesVoIP Deployed Cities

Qwest14-state Local Service AreaQwest14-state Local Service Area

Qwest POPs

VoIP Deployed CitiesVoIP Deployed CitiesVoIP Deployed CitiesVoIP Deployed Cities

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Euteneuer to Lead Qwest’s FinancesBy Roger ChengB5

Qwest Communications International Inc. hired former XM Satellite Radio and Comcast Corp. executive Joseph Euteneuer to serve as chief financial officer…

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

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….

September 15, 2008

http://online.wsj.com/

http://online.wsj.com/

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Total US Consumer Confidence Index: 3Q06 - 2Q10E

0

20

40

60

80

100

120

CC

Inde

x (1

985

= 10

0)

Single Family Homes - Building Permits 2006 - 2010E

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

Build

ing

Perm

its -

Nat

iona

l (M

)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Na

tion

al

The Business Environment Post 9/15

Source: the Conference Board and NIPA; Moody’s Economy.com Source: Bureau of Labor Statistics: Current Population Survey; Moody's Economy.com

Source: Office of US District Courts; Moody’s Economy.comSource: Bureau of Census: Form C-404; Moody's Economy.com

U.S. Unemployment Rate: 2008 - 2011E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

US US last qtr view

U.S. Business Bankruptcy Filings: 3Q06 – 2010E

6

6

The Street’s Perspective of Q

77

2009 Total Qwest Guidance

Qwest is on track to meet Guidance and Analyst Consensus in 2009

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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 - $1,600 1,561$

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Buy/$5.00

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Bank of America, David Barden – Key Points

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– Qwest’s EBITDA multiple is the lowest in the sector while its ‘09E

FCF yield of 21% is among the highest

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Hold/No Price Target

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Morgan Stanley, Simon Flannery – Key Points

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

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Sell/$2.75

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Goldman Sachs, Jason Armstrong – Key Points

• 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

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Creating Shareholder Value

Sustainable Free Cash Flow “Growth”

1212

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

The value of a company is determined by its expected discounted Free Cash Flow

*Perception Value - Shorthand metric to reflect the expected Discounted cash flows of a business, discount rate (including risk) and expectedcash flows growth.

Shareholder Value

Increasing Shareholder

Value

Return on Investment

Capital

Weighted Average

Cost of Capital

Sustainable Free Cash Flow

Growth

1313

Analyst Estimates for Q

Implied Implied

Adj EBITDA Adj FCFPerception

Value* Price Target Adj EBITDA Adj FCFPerception

Value* Price Target

Bank of America 4.24$ 1.49$ 12.9x 4.00$ 4.33$ 1.59$ 13.2x 5.00$

BMO 4.31 1.39 13.8x 4.00 4.34 1.23 16.4x 4.50

Citi 4.28 1.42 15.9x 6.00 4.40 1.59 13.8x 5.50

Goldman Sachs 4.17 1.33 12.5x 2.50 4.34 1.59 10.7x 2.75

JP Morgan 4.21 1.44 12.1x 3.00 4.33 1.65 13.7x 6.00

Morgan Stanley 4.11 1.36 15.2x 4.93 4.36 1.55 n/a n/a

Oppenheimer 4.22 1.40 n/a n/a 4.32 1.51 n/a n/a

Thomas Weisel 4.34 1.43 13.1x 3.75 4.32 1.50 12.9x 4.00

UBS 4.14 1.32 13.9x 3.50 4.41 1.55 12.2x 3.80 Wells Fargo 4.28 1.65 n/a n/a 4.42 1.69 n/a n/a

Analyst Consensus 4.20 1.40 13.9x 4.19$ 4.35 1.56 13.0x 4.61$ Max Estimate 4.31 1.65 15.9x 6.00 4.42 1.72 16.4x 6.00 Min Estimate 4.11 1.32 12.1x 2.50 4.30 1.23 10.7x 2.75 Budget 4.40 1.50 13.0x 4.40 1.50 13.0x

Guidance 4.2 to 4.4 1.4 to 1.5 4.25 to 4.4 1.5 to 1.6

* Implied Perception Value is defined as Q Enterprise value divided by the analyst's adjusted FCF estimate

Feb-09 Sep-09

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FCF x Implied

Perception Value

= Total Value

FCF x Implied

Perception Value

= Total Value

1,591 x 13.2 = 20,942 1,589 x 10.7 = 17,065

Total Value

- Net Debt = Equity Value

Total Value

- Net Debt = Equity Value

20,942 - 12,327 = 8,615 17,065 - 12,327 = 4,738

Equity Value

∕ Shares = Price

TargetEquity Value

∕ Shares = Price

Target8,615 ∕ 1,723 = 5.00$ 4,738 ∕ 1,723 = 2.75$

Bank of America Valuation Model Goldman Sachs Valuation Model

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David Barden’s Perception of Q:

• Confident that Q will resolve debt towers through refinancing

• Meaningful results in business markets

• Consumer access line loss should continue to slow as FTTN matures

• Views IXC auction as a positive indication that Q is exploring value

Jason Armstrong’s Perception of Q:

• Intense revenue pressure

- Large wholesale disconnects

- Mass markets pressure intensified

• Unfavorable FTTN trajectory

• Unsuccessful IXC auction

Perception Value Models

1515

Perception Value Sensitivity Analysis

FCF 11.4x 11.6x 11.8x 12.0x 12.2x 12.4x 12.6x 12.8x 13.0x 13.2x 13.4x 13.6x 13.8x1,800$ 4.76$ 4.96$ 5.17$ 5.38$ 5.59$ 5.80$ 6.01$ 6.22$ 6.43$ 6.64$ 6.84$ 7.05$ 7.26$ 1,750$ 4.42$ 4.63$ 4.83$ 5.03$ 5.24$ 5.44$ 5.64$ 5.85$ 6.05$ 6.25$ 6.46$ 6.66$ 6.86$ 1,700$ 4.09$ 4.29$ 4.49$ 4.69$ 4.88$ 5.08$ 5.28$ 5.47$ 5.67$ 5.87$ 6.07$ 6.26$ 6.46$ 1,650$ 3.76$ 3.95$ 4.15$ 4.34$ 4.53$ 4.72$ 4.91$ 5.10$ 5.29$ 5.49$ 5.68$ 5.87$ 6.06$ 1,600$ 3.43$ 3.62$ 3.80$ 3.99$ 4.17$ 4.36$ 4.55$ 4.73$ 4.92$ 5.10$ 5.29$ 5.47$ 5.66$ 1,561$ 3.17$ 3.35$ 3.54$ 3.72$ 3.90$ 4.08$ 4.26$ 4.44$ 4.62$ 4.80$ 4.99$ 5.17$ 5.35$ 1,500$ 2.77$ 2.94$ 3.12$ 3.29$ 3.47$ 3.64$ 3.81$ 3.99$ 4.16$ 4.34$ 4.51$ 4.69$ 4.86$ 1,450$ 2.44$ 2.61$ 2.78$ 2.94$ 3.11$ 3.28$ 3.45$ 3.62$ 3.79$ 3.95$ 4.12$ 4.29$ 4.46$ 1,400$ 2.11$ 2.27$ 2.43$ 2.60$ 2.76$ 2.92$ 3.08$ 3.25$ 3.41$ 3.57$ 3.73$ 3.90$ 4.06$ 1,350$ 1.78$ 1.93$ 2.09$ 2.25$ 2.40$ 2.56$ 2.72$ 2.87$ 3.03$ 3.19$ 3.34$ 3.50$ 3.66$ 1,300$ 1.45$ 1.60$ 1.75$ 1.90$ 2.05$ 2.20$ 2.35$ 2.50$ 2.65$ 2.80$ 2.96$ 3.11$ 3.26$

= August 2008 (H = $4.01, L = $3.43)

Enterprise Perception Value Multiple

1616



= August 2008 (H = $4.01, L = $3.43) = November 2008 (H = $3.38, L = $2.28)


1717




= April 2009 (H = $4.06, L = $3.42)


1818




= April 2009 (H = $4.06, L = $3.42) = September 2009 (H = $3.72, L = $3.34)


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19


20





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2121

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

The value of a company is determined by its expected discounted Free Cash Flow

*Perception Value - Shorthand metric to reflect the expected Discounted cash flows of a business, discount rate (including risk) and expectedcash flows growth.

Shareholder Value

Increasing Shareholder

Value

Return on Investment

Capital

Weighted Average

Cost of Capital

Sustainable Free Cash Flow

Growth

22Perfecting the Customer Experience

Simplify our Focus to Drive Shareholder Value

Execution

RevenueAdministrative /

Operating Expense

Capital Expectations

Shareholder Value

New Customers

Existing Customers

ARPU – Wallet Share

Acquisition Cost

Service Cost

Facility Cost

Shared Support

3rd Party Payments

Capital Spending

PP&E Efficiency

Working Capital

Efficiency

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Balanced Approach to Capital and Investing

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Comparative Balance Sheet

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QWEST COMMUNICATIONS INTERNATIONAL INC.CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED) June 30, December 31,

2009 2008

(Dollars in millions)

ASSETS

Current assets:Cash and cash equivalents................................................................. 1,796 $ 565 $ Other................................................................................................. 2,252 2,405

Total current assets............................................................................... 4,048 2,970 Property, plant and equipment—net and other..................................... 16,178 17,171

Total assets........................................................................................... 20,226 $ 20,141 $

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:Current portion of long-term borrowings ......................................... 1,085 $ 820 $ Accounts payable and other.............................................................. 2,703 3,033

Total current liabilities......................................................................... 3,788 3,853 Long-term borrowings—net................................................................. 13,038 12,735 Other..................................................................................................... 4,451 4,939

Total liabilities..................................................................................... 21,277 21,527 Stockholders' equity ............................................................................ (1,051) (1,386)

Total liabilities and stockholders' equity.............................................. 20,226 $ 20,141 $

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Balance Investment in Growth with Returns to the Shareholder

2009 Investment and Return- $2.8B (estimated)

In millions of dollars

$1,700$549

$528

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

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$ in Millions

Notes: • 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

2,168 2,151

1,900

3,389

950

Qwest Debt Maturity Schedule

Unregulated QCII and QCF (pay down) Regulated QC (re-finance)

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2009 – 2011 Quarterly Debt Maturity Schedule

$500

$825

$1,265

$525 $403

$801

$0

$400

$800

$1,200

$1,600

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11

$2.6B in Debt maturities within 90 days –

“The Elephant”

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Unregulated QCII and QCF (pay down) Regulated QC (re-finance)

282828

In the 90 day period between Nov. 2010 and Feb. 2011, Qwest has $2.6 Billion Debt Maturing (The

“Elephant”)

$2.6 Billion

… One Piece at a Time

Combined with cash on hand and expected cash flow generation, we need to finance approximately $800 Million to finish the meal.

= $.8 Billion

So – How Do You Eat an Elephant?

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September 2009 Bond Offering

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$502 $505

$680

$799

$517 $484$440

$707

$518

03 04 05 06 07 08 09 10 11

Capital Markets Seize Up

High Yield Bonds ($ in billions)

Upcoming Annual Maturities

Annual New Issuance

Investment Grade Corporate (Non-Financial) Bonds ($ in billions)

Upcoming Annual Maturities

Source: Citi Source: Citi Syndicate

$158

$112

$181$165

$51$62

$71

$40

$143

03 04 05 06 07 08 09 10 11

Annual New Issuance

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Qwest Yields and High Yield Market Issuance

$0

$2

$4

$6

$8

$10

$12

$14

1/3/06 4/3/06 7/3/06 10/3/06 1/3/07 4/3/07 7/3/07 10/3/07 1/3/08 4/3/08 7/3/08 10/3/08 1/3/09 4/3/09 7/3/09

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

Weekly HY Issuance YTW on QCII 7.5% Senior Notes due '14

8.59%

21.255%

9/16/08 Lehman files

for bankruptcy

3/9/09S&P 500 2009 low

Heightened LBO Activity

“Cheap Money” – unlikely to return to these levels

Heavy issuance volume($ in bn)

Current yields are comparable to 2008 (pre-Lehman) levels

8/18/09

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September 14th – Why did Qwest launch a bond offering?

Re-financedecision

Now

Later

Pay rateas of 9-14(8.375%)1

Opportunity cost - could have paid

lower rate

Pay higher rate

(could be 20%+)

Pay lower rate1

Rates increase

Rates increase

Rates decrease

Rates decrease

1 Best rate issued since 2002 is in the low 7% range

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%

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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)

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Asset Strategic Review

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Introduction – Opportunity

Qwest Corporation 14-state Local Service Area

Qwest POPs

VoIP Deployed Cities

Qwest Central Offices

Qwest Communications International Inc. (“QCII”)Unregulated parent company traded on the NYSE “Q”with a state-of-the-art nationwide fiber optic networkand 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 stand-alone business unit with financial statements

1) As of Q2 2009

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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

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Identify the Specific Assets – Due Diligence Process

Physical AssetsPhysical Assets Customer AssetsCustomer Assets Human CapitalHuman Capital

• Detailed process to identify specifically what physical assets the buyer was interested in

• For example: fiber in the ground from city A to city B, etc.

• Detailed process to identify what customer contracts and revenues would be included in the sale

• Many lawyers reviewing contracts

• Audited financial statements needed to be created

• 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 leavingthe company in exchange for a purchase price

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Valuation – Value to a Buyer of Assets

NPV (net present value) of the cash flows discounted at the company’s WACC (weighted average costof capital) is the value of purchasing the assets inclusive of synergy value

2,0002,100

2,2002,300

2,400

800900

1,0001,100

1,200

0

500

1000

1500

2000

2500

3000

2010 2011 2012 2013 2014

Revenue FCF

Asset Purchase

• Buyer will estimate future cash flows

• Identification of synergies is typically a significant value driver

• For example, elimination of duplicative overhead

Considerations

Not actual numbers /For illustrative purposes only

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Valuation – Value of Retaining Assets

NPV (net present value) of the cash flows discounted at the company’s WACC (weighted average costof cost of capital) is the value of retaining the assets plus the avoided transaction costs and dis-synergies

2,0002,200

2,4002,600

2,800

1,0001,100

1,2001,300

1,400

0

500

1000

1500

2000

2500

3000

2010 2011 2012 2013 2014

Revenue FCF

Asset Sale

• Review of assets and operations

• Sale of assets may involve dis-synergies

• For example, corporate overhead allocated over a smaller revenue base

• Separation of assets involves transaction costs

Considerations

Not actual numbers / For illustrative purposes only

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Evaluation of the Purchase Offer

Consideration Consideration Execution Risk

Execution Risk

Financial Markets Risk

Financial Markets Risk

• Currency utilized could be: • Cash• Stock• Debt• Commercial agreements• Combination of the above

• Terms & conditions of contract

• 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

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Conclusion

•Value of retaining the assets was greater than purchase price proposed by the buyer

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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.

1 advanced corporate finance university of colorado-boulder leeds school of business october 7, 2009...

Documents

qwests business slide

e slide

highest slide

qwest line

total qwest guidance

probability of qwest

streets perspective

asset strategic review