Last month I bet a barista, who works for a local coffee shop here in Seattle known as Uptown Espresso (http://www.uptownespresso.net), that Qwest, the Denver-based telecommunications company that owns the local phone lines in Washington and 13 other Western states, would go bankrupt by late summer or this fall. As the bet stands I would owe the barista $10 if my prediction of a Qwest bankruptcy turns out to have been wrong, and he would owe me a 12 oz. bag of Uptown coffee grounds if Qwest does have to file some form of bankruptcy.

The prediction I made at the time of the bet was that Qwest, currently under investigation in a criminal probe by the Justice Department and a regulatory probe by the Securities and Exchange Commission for its accounting practices, would have to fess up to overstating its revenue for the past year by about $1 billion. Well, on July 12 the Dow Jones Newswires reported that Qwest may have to restate its earnings for 2001, reducing the company's annual revenue by about $1 billion, as I predicted. If the restatement does happen, then it would increase Qwest's total loss for 2001 to $5 billion. Qwest posted revenue of $19.7 billion in 2001.

So far so good, but I haven't won that bag of delicious coffee grounds yet. Will Qwest survive or will it declare some form of bankruptcy? One thing is for sure: Qwest is most likely going to be a smaller company by next year. A July 15 news brief in the Denver Post reported the number of bidders for Qwest's directory service, QwestDex, is down to two groups. One of the groups includes the now infamous Carlyle Group plus Welsh, Carson, Anderson and Stowe, Madison Dearborn Partners, and the private equity arm of JP Morgan Chase. The other group is made up of Thomas H. Lee Partners, Blackstone Group, Bain Capital, and Providence Equity Partners.

Qwest has a lot more assets than some of the other fallen telecommunications giants out there, like Global Crossing and Worldcom. Also, Qwest recently was allowed to apply for providing long distance service in the 14 states where it owns the local phone lines. Qwest currently has nine applications pending with the Federal Communications Commission, and plans to file four more applications by August, so there is hope for the troubled telecom. The problem is that finding a buyer for Qwest's assets during this recession has been very difficult. Banks aren't issuing new credit like they did a few years ago, particularly for the purchase of telecom infrastructure. Furthermore, Fortune 500 companies, who've seen their stock prices plummet, can't use their market capitalization to finance acquisitions like they did during the bear market of the late '90s. Qwest's stock price is hovering around $2 per share these days. A complete buyout of Qwest by another telecom company is highly unlikely, as the rest of the telecom industry is either bankrupt or swimming in an ocean of debt.

New Qwest CEO Richard Notebaert is known for preparing companies for a sale shortly after he arrives at his new job. With the prospect of a full buyout of Qwest as unlikely as it is, my prediction of a Qwest bankruptcy might turn out to come true. Notebaert may have no choice but to declare a Chapter 11 reorganization bankruptcy, sell off what company assets he can at bargain prices and then try to renegotiate the company's large debt. (As of the fall quarter of last year the company's interest bearing debt, based on one of its November SEC filings, stood at about $59 billion, not the $26 billion that is being reported in the Denver Post. What the Post is most likely not including in its reporting of Qwest's debt is the $30.8 billion sticker price for Qwest's 2000 buyout of US West--all borrowed money of course--which the company has been reporting as an intangible asset in the form of "goodwill." New accounting rules require that companies like Qwest will have to write down their excess "goodwill" this year.)

How the proposed sale of QwestDex turns out may have a lot to do with Qwest's fate between now and the end of the year. Qwest's potential re-entry into the long distance market in the areas where it owns the local phone lines may be too-little-too-late. It's worth remembering that last year Qwest was seriously considering selling all of its customer's private information to the highest bidders, until public pressure and media coverage forced the company to back down early this year.

We have apparently been spared the delight of observing Amazon.com go bankrupt here in Seattle. If the out-of-town owner of our local phone lines, already legendary for its poor customer service after owning the phone lines for only two years, goes bankrupt, it would mitigate the disappointment of not seeing Amazon.com bite the dust.

--Rick Giombetti, with some additional material from Maria Tomchick