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					Analysis and Valuation of



       Team Members:
        Miles Libbey
       Ann Plamondon
        Noah Postyn
       Jonathan Siskin

        Accounting 712
         April 8, 1999
                     Agenda
   Industry Overview
   Qwest Company Overview
   Company Analysis
    – Business Strategy
    – Accounting Analysis
    – Financial Analysis
   Valuation Methodology and Assumptions
   Key Findings
   Conclusions
   Questions & Answers
             Industry Overview


“Players in the telecommunications industry are
focusing on expanding their existing asset bases
into more diverse and efficient machines. The main
goal is Growth with a Purpose.”
Source: S&P Industry Survey: Telecommunications Wireline,
Sept. 17, 1998, p. 5
There are Several Dominant
    Players in the U.S.
    Potential Impact of the Telecom
          Act of 1996 is Huge
 Local telephone companies, long-distance
  carriers, and cable TV operators can enter
  each others’ markets
 New choices, lower prices for customers
 Double-edged sword for telecom operators



       Access to new     Competition in all
      revenue sources   segments = smaller
                           profit margins
Several Trends Are Beginning to
           Emerge….
   Industry Consolidation (MCI-WorldCom)
   Globalization (AT&T and BT)
   Bundled Services:
    – Local service
    – Long-distance
    – Wireless
    – Data Transmission
    – Cable TV
     Qwest Company Overview

“Qwest is the first great high technology
company of the 21st Century.”

Source: Joe Nacchio, Qwest’s Chairman and CEO,
Feb. 24, 1999.
           Qwest Communications
   Facilities-based multi-media communications
    provider
   Two core businesses
    – Communications Services
    – Construction Services
   Fifth largest U.S. long-distance carrier
   IPO: June 27, 1997
   Current stock price (4/6/99): $80
   Market Value: $22.3 billion
Qwest Has Relied on an Aggressive
       Acquisition Strategy
  Date      Acquired           Company          Acquisition      Accounting
            Company           Description      Price/Form of     Treatment
                                                 Payment
  10/97   SuperNet, Inc.        Regional        $20.2 million/   Purchase
                            Internet service    All cash deal
                                provider
  3/98       Phoenix         Non-facilities-    $27.2 million/   Purchase
           Network, Inc.     based reseller        All stock
                            of long-distance     transaction
                                 services
  4/98        EU net           European         $154 million/    Purchase
           International    Internet service   Stock and cash
                                provider         transaction
  6/98          LCI         Long-distance       $3.9 billion/    Purchase
           International,      reseller           All stock
                Inc.                            transaction
  12/98   Icon CMT Corp.    Internet service   $254.1 million/   Purchase
                                provider          All stock
                                                transaction
Strategy Based Upon High-end, High-
     capacity Fiber Optic Network
Difficult to build                               Leapfrogging
 brand equity         Consumer demand for         technology
                       broadband services

                            Key
            Technology:                  Access to
             1st mover
                          Success        financial
             advantage    Factors        markets

                      Partnerships to build
                      network and leverage
                             sales
Large, well funded,                            Glut of fiber
    entrenched                                 optic cable
   competitors        Business Risks
    Accounting Analysis - Highlights
   Key accounting policy highlights
     – Principles of Consolidation
     – Communications Services Revenue
     – Long-Term Construction Contracts
     – R&D
     – Property and Equipment
 Moderate degree of accounting
  flexibility exhibited
 Straightforward accounting strategy
         Accounting Analysis -
          Highlights (Cont’d)
   High quality of disclosure
    – Comparison with MCI WorldCom financial
      reports
    – Consistent with industry norms
 No significant red flags
 No material accounting distortions
Ratio Analysis - Difficult Year for
         Comparisons
 Benchmark with immediate peer group
  and three major long-distance providers
 Difficulties with:
    – $3.9 billion acquisition of LCI
    – Still in building phase
DUPONT MODEL              Qwest     Frontier   AT&T
ROS                       (37.6%)   6.8%       9.0%
Asset Turnover            0.47      0.94       0.90
Financial Leverage        1.90      3.00       2.59
ROE                       (33.9%)   19.0%      21.1%
    Cash Flow Analysis - Period of
       Tremendous Expansion
 $1.4 billion investment in property and
  equipment - over 3X 1997
 Financed via long-term debt
 Sufficient cash for working capital and
  interest requirements
 No pattern of divergence of cash flows
  from operations and net income
         Valuation Methodology
   Abnormal Earnings Model - what else?
    – Forecast of income statement for 10 years
   Terminal Valuation based on AE/ROE
    perpetuity
    – Assumed growth rate of 5%
   Conducted Monte Carlo simulation of
    valuation to assess model sensitivity
     Major Valuation Assumptions
   Dramatic revenue growth
    – Used management estimates for 1999 and
      2000
    – Post 2000, modeled growth to decline from
      30% to 17% over 10 year horizon
   Margin improvement
    – COGS, SG&A cost decline as % sales
 D&A increase due to purchase accounting
 Tax rate of 40%
                       Financial Projections….

              25,000        Sales          Net Income     Profit Margin      25.0%


              20,000                                                         20.0%
$ (Million)




              15,000                                                         15.0%


              10,000                                                         10.0%


               5,000                                                         5.0%


                  0                                                          0.0%
                   1998   2000      2002      2004      2006    2008      2010
            Valuation Results
 Model indicates share price of $28.60
  versus market price of $80.00 as of
  4/6/99
 Two hypotheses for discrepancy
    – Market bases terminal valuation on
      multiple of EBITDA
    – Market valuing as yet unforeseen business
      opportunities
   Monte Carlo Simulation Indicated
    a Mean Stock Price of $23.37
Mean = $23.37                Median = $22.19                      Std. Dev. = $6.07
                                      Fore cas t: Stock pr ice

 5,0 00 Tr ial s                          Fr equency Char t                          4 0 Outlier s
        .01 8                                                                          91




        .01 4                                                                          6 8.2 5




        .00 9                                                                          4 5.5




        .00 5                                                                          2 2.7 5




        .00 0                                                                          0

                   5 .0 0   1 3.7 5              2 2.5 0         3 1.2 5   4 0.0 0

                                                $/s ha re
       Final Recommendation....
   SELL!!!
    – Due to the discrepancy between the
      current stock price and the valuation of our
      model
    – However, due to a great deal of
      uncertainty regarding future prospects,
      selling short may be overly aggressive
Questions & Answers

				
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