UPDATE: Sprint's Embarq Starts New Independent Life
By Jeffry Bartash
WASHINGTON (Dow Jones) -- Embarq Corp., a local-phone company spun off
by Sprint Nextel Corp., is slated to begin trading Thursday as an
independent company.
The spinoff was completed late Wednesday. Under the transaction, each
Sprint (US-S) stockholder on record as of May 8 received one share of Embarq
(EQ) for every 20 shares of Sprint.
By spinning off Embarq, Sprint will be able to focus on almost
entirely on its fast-growing wireless business, though the company
also operates the nation's third-largest long-distance network.
Embarq, for its part, may not have received the attention it needed
from Sprint executives as they concentrated on wireless. Independence
brings new challenges, but it gives Embarq a greater chance to chart
its own course. The company, with 20,000 employees and more than $6
billion in annual sales, operates in 18 states.
While Embarq has been losing customers for years to competitors or
alternative technologies such as wireless, the local-phone business
still generates plenty of cash and could attract investors in search
of high dividend yields.
The new company also expects gains in high-speed Internet subscribers
to partly offset losses in local access lines.
As Sprint reported earlier this month, Embarq's revenue is projected
to decline to $6.4 billion to $6.5 billion in 2006 from $6.7 billion a
year earlier, on a pro forma basis. Pro forma results assume that the
spinoff had occurred on Jan. 1, 2005, thereby allowing for financial
comparisons.
Similarly, adjusted operating income is seen falling to $1.45 billion
to $1.55 billion in 2006 from $1.76 billion a year earlier. And Embarq
would start off with about $7.2 billion in debt.
The number of access lines -- each line is basically the equivalent of
one phone line -- is expected to decline by 5.5% to 7.5% in 2006. The
local unit had 7.26 million access lines in service at the end of the
first quarter.
Yet Embarq is also expected to increase its number of DSL high-speed
Internet users by 40% year over year. In the first quarter, the local
unit added 84,000 DSL customers to end with 777,000.
Embarq plans to spend more money to sign up high-speed Internet
customers -- the unit's primary growth segment -- and to launch its
own Embarq-branded wireless service via a wholesale agreement with its
former parent company.
Like other local phone companies, Embarq is trying to sign up local
phone customers for high-speed service to prevent them from fleeing to
rival providers. Subscribers who receive DSL are less likely to leave,
market studies have shown.
To achieve its goal, the local unit offers discounted packages of
services -- local, long-distance, DSL and soon wireless.
"Our goal is to make our services easier to use by integrating
technologies in ways that enhance our customers' lives and
businesses," Chief Executive Dan Hesse said in a statement.
While competition in the phone business remains fierce, Embarq would
be partly shielded by its concentration in second-tier or rural
markets that offer a sanctuary of sorts.
Still, some investors argue that competition will continue to siphon
off customers, force the company to scale back dividend payments and
ultimately undermine its stock price.
To avoid that outcome, executives of Embarq have indicated they plan
to pursue acquisitions more aggressively once the separation is
complete. Bigger phone carriers are looking to sell some of their
access lines and smaller rural carriers might be available at
reasonable prices.
By acquiring fresh assets, the company could obtain more net access
lines, boost revenue and cash flow and generate greater savings by
combining network operations.
In gaining independence, Embarq becomes the No. 1 "pure-play" provider
of local phone service in rural America, surpassing CenturyTel
Inc. (CTL) and Citizens Communications (CZN) .
Within a few months, Alltel Corp. (AT) also plans to spin out its
local-phone business, making it No. 2 behind Embarq in the rural
market.
Embarq is listed on the New York Stock Exchange.
Copyright (c) 2006 Dow Jones & Company, Inc.
http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20060518-000690-0906
Jeffry Bartash (dowjones@telecom-digest.org)