Troubled Qwest

When new management took over at Qwest Communications (NYSE: Q  ) back in 2002, the smallest of the Baby Bells phone companies was facing falling revenues, saddled with debt, and suffering big legal problems. Well, as its second-quarter figures show, little has changed. Things still look bad at Qwest.

Qwest's main business, local fixed-line telephone service, is in decay. In the last 12 months, Qwest lost close to a million residential phone lines, a distressing 8.8% fall. A lot of those customers cut the cord entirely, jumping to wireless services. But unlike the bigger Bells -- SBC Communications (NYSE: SBC  ) , Verizon (NYSE: VZ  ) , and BellSouth (NYSE: BLS  ) -- Qwest didn't make up for the slide with gains in wireless. In fact, Qwest's wireless subscriber base shrunk by 14% in the second quarter.

Qwest wasn't able to find many more customers for the other major business: long-haul fiber-optic networks. In that competitive business, which suffers from excess capacity and nasty pricing wars, any victories over AT&T (NYSE: T  ) , Sprint (NYSE: FON  ) , and MCI (Nasdaq: MCIP  ) translated into losses.

Negative and shrinking free cash flow means a higher risk to Qwest's ability to pay off its enormous debt load. At the end of Q2, Qwest had $1.5 billion in cash and, even after big reductions in the past two years, $16.4 billion in long-term debt. Interest on that debt remains the biggest item on Qwest's expense line.

Clearly, lawsuits will continue to keep Qwest occupied. The company has now set aside $500 million to cover settlement costs arising from ongoing investigations by the Securities and Exchange Commission and the Justice Department over alleged accounting shenanigans through 2002.

On the back of the dismal Q2 numbers, Qwest shares sank 20% yesterday to a two-year low of $3.17 and another 6% today to $2.98. Even so, the shares trade on an enterprise value-to-EBITDA multiple of 6. That's higher than the multiples for better-positioned Verizon and SBC Communications. The torturous problems at Qwest will take a long time to solve -- if ever. Don't mistake the price slump as a buying opportunity.

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Fool contributor Ben McClure hails from the Great White North. He doesn't own any companies mentioned here.


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