Qwest Directs $7.04 Billion LBO –

Burdened by just about every corporate malady short of a bankruptcy filing, Qwest Communications Inc. tried resuscitating itself yesterday by agreeing to sell off its yellow pages unit for $7.04 billion to The Carlyle Group and Welsh, Carson, Anderson & Stowe. And it may have actually worked-at least for the time being-as Qwest shares leaped 24% on the news to close Tuesday trading at $2.95.

The yellow pages business, named QwestDex, has been on the block since early May as part of the Denver-based telecom company’s ongoing effort to reduce its massive debt burden by selling non-core assets. Not only does Qwest have an outstanding $3.4 billion credit facility from Bank of America, but it will make approximately $2.3 billion in additional debt payments between Q3 2002 and Q2 2003. While the final sale price came in lower than the predicted range of $8 billion to $10 billion, sources say $7.04 billion is still enough to hold creditors at bay while the company tries to regroup.

The deal represents the third-largest leveraged buyout in history. In dollars, the equity contribution is significant, at $1.75 billion, but as a percentage of the purchase price it’s a surprisingly low 25 percent. And Carlyle and Welsh Carson won’t even provide the entire equity portion, as sources say both firms are soliciting an outside co-investment of approximately $500 million. The two participating private equity firms will split their participation evenly, while the debt will be provided by Bank of America, J.P. Morgan Chase, Deutsche Bank, Lehman Brothers and Wachovia Securities.

The deal was sold at 7.5x EBITDA, and includes various safeguards related to an ongoing Department of Justice/Securities and Exchange Commission probe into accounting irregularities at Qwest.

;The sale is basically in line with historical directory sales, although perhaps it’s a bit on the low end because Qwest really needed to sell when it did,” says Tavis McCourt, a telecom analyst with Morgan Keegan.

Other analysts also hailed the deal, saying the long-term loss of reliable QwestDex revenue was far outweighed by the present need to reduce debt and reset multiples. “Qwest should be cutting everything that is non-core – like [an expected sale of ] their wireless towers] – and this was a big part of that,” says Greg Gorbatenko, an analyst with Loop Capital Markets.

The QwestDex sale also may have helped set a market price for smaller directories