Balance Sheet

Qwest exited 3Q10 with cash and cash equivalents of approximately $1,967.0 million versus $2,074.0 million in 3Q09. Long-term borrowing was $10,788.0 million in 3Q10 versus $13,210.0 million in 3Q09. Net debt in 3Q10 was $11,012.0 million versus $12,057.0 million in 3Q09 and the ratio of net debt to annualized adjusted EBITDA was 2.5 versus 2.7 in 3Q09.

The Company remains on track with its plans to trim debt by $3.5 billion through 1Q11.

Cash Flow and Capital Expenditure

In 3Q10, cash from operation was $923.0 million versus $769.0 million in 3Q09. Capital expenditure was $373.0 million versus $341.0 million in 3Q09. Adjusted free cash flow was $554.0 million versus $428.0 million in 3Q09.

For FY10, management expects capital investment to be $1.7 billion with approximately $150 million of this investment financed by leasing. Adjusted free cash flow is expected to be in the range of $1.7 to $1.8 billion (including capital leasing).

Acquisition by CTL

Qwest agreed to be acquired by rural telecom carrier CTL on April 22, 2010, in an all-stock deal worth more than $10 billion. The valuation of CenturyLink's purchase as of April 21, 2010, is $22.4 billion, including the assumption of $11.8 billion of outstanding debt held by Qwest as of December 31, 2009. Under the terms of the deal, Q shareholders will receive 0.1664 CTL shares for each share of Q common stock that they own at closing. Upon closing of the transaction, CTL shareholders are expected to own approximately 50.5% and Q shareholders are expected to own approximately 49.5% of the combined entity.

Both companies’ Boards have approved the merger deal, which is expected to close in the first half of 2011. The companies received clearance from the Department of Justice and twelve other state regulatory utility commissions. The transaction is still pending approval in ten other states, the District of Columbia and at the Federal Communications Commission (FCC). The merger is expected to generate cost synergies of roughly $625 million over 3−5 years following the closure of the deal. Each company plans to continue their respective dividend policy until the completion of the transaction.

The merger will create one of the largest national landline phone companies with nearly $20 billion in annual revenues, 17 million phone lines, 5 million broadband connections and operations across 37 states. The integrated entity will have complementary assets and geographic coverage and will compete with greater scale and operational efficiency in a mature U.S. home-phone market. Moreover, improved network scale will boost penetration of IPTV and other high-bandwidth services into the rural markets.

Most firms believe Q has taken the right strategic decision to participate in a scale-enhancing transaction that will allow the integrated entity to generate substantial operational and capital cost synergies.. It will lead to increased dividend for Qwest shareholders. The combination will also create a 173,000-mile national fiber network, which will allow greater scale, scope, and opportunities.
 

• Competitive Threats: Increased wireline competition from cable companies as well as from big players like AT&T and Verizon will get intensified over the quarters. Lower spending in marketing followed by lack of exposure in the wireless segment will make it difficult for Qwest to retain customers in the long run.
• Wireline Substitution: As high priced smartphones penetrate the market, pressure on the wireline segment will increase. More users will opt for wireless solution at the expense of wireline solution resulting in more access lines losses.
• Macroeconomic Factors: Telecom industries are highly vulnerable to the macroeconomic environment, and are subject to risks from changes in technology, government regulation, exposure to economic cycles, and slow wireless growth.
• Regulatory Issues: Regulatory environment may become less favorable since Qwest needs several state and federal approvals before it can complete its merger with CenturyLink.