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Sprint's Embarq starts new independent life

Thu, 05/18/2006 - 7:28am

Copyright 2006 AFX News Limited
AFX - Asia
May 18, 2006 Thursday 1:41 PM GMT
From Lexis Nexis

WASHINGTON (AFX) -- 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 stockholder on record as of May 8 received one share of Embarq for every 20 shares of Sprint.

By spinning off Embarq, Sprint will be able to focus 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.

Financial picture

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.

Bundling strategy

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. and Citizens Communications.

Within a few months, Alltel Corp. 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.

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