Posted on: Monday, August 9, 2004
Carlyle's plan for Verizon: No rate hike for 10 years
By Sean Hao
Advertiser Staff Writer
The buyer of Verizon Communication's Hawai'i telephone business expects to boost sales and profits during the next 10 years, despite increasing its payroll, operating costs and debt, according to a recent Public Utilities Commission filing.
The Carlyle Group, which in May announced it will buy Verizon Hawaii for $1.65 billion in cash, also said it expects continued competition from cable and wireless companies. At the same time, the investment firm plans to keep service rates the same through 2014 and keep benefits for current employees comparable should the deal go through early next year.
Whether Washington, D.C.-based Carlyle can pull off that plan could have a significant impact on the availability, quality and cost of services to its customers. Verizon Hawaii is among the state's larger private employers and is Hawai'i's main provider of telephone services. The feasibility of Carlyle's financial plan and its impact on customers will be a key subject for the state PUC as it decides whether to bless the deal in coming months.
"That's one of the lightening issues in terms of the financial fitness, so yes the commission is going to look into those issues," said Kris Nakagawa, chief legal counsel for the commission. On Friday the PUC announced that there will be no public hearings on the Carlyle deal though the public will have the opportunity to submit comments in writing.
Among the questions now being raised by parties affected by the deal is the level of Carlyle's expertise in telecommunications and whether it can successfully carry out an ambitious plan to relocate back-office jobs from the Mainland to Hawai'i. Questions also have been raised about Carlyle's assumptions concerning expenses, costs and interest rates during the next decade.
And a planned increase in the company's debt has resulted in a downgrade of Verizon Hawai'i's debt by Fitch Ratings shortly after the deal was announced. If the deal goes forward, Hawai'i's main telephone company is expected to see its debt grow to $1.5 billion from about $425 million.
For now, Carlyle has declined to openly address such questions. Carlyle also declined to identify the makeup of the phone company's local management and investment team. Carlyle has said Walter Dods, chairman of First Hawaiian Bank, will head a group of local investors that will join Carlyle in the purchase.
"Carlyle is working closely with the PUC to facilitate the PUC's regulatory review of our proposed purchase of Verizon Hawaii," said Carlyle spokesman Chris Ullman in an e-mailed statement. "During this time, Carlyle is focused on addressing the PUC's questions about the transaction and feels it best not to comment on specific public inquiries related to the filing."
In an effort to ensure such issues are addressed by the PUC, the U.S. Department of Defense, the International Brotherhood of Electrical Workers, Pacific LightNet Inc., and Time Warner Telecom of Hawaii L.P. sought and received permission to become involved in the PUC process. Of those, only Pacific LightNet opposes the deal at this point.
Pat Bustamante, president of Internet service provider Pacific LightNet, said the company is concerned that Carlyle is underestimating the cost, time and expertise required to bring to Hawai'i operations now done by Verizon on the Mainland, such as information technology, management, legal and human resources.
If Carlyle's financial plan doesn't work, it may need to cut jobs or raise rates to succeed, he said.
"I'm not saying Carlyle is bad for Hawai'i," Bustamante said.
"I'm saying these are real concerns. The fact is ... (Carlyle's financial plan) is just not adding up. We need to be assured that there will be no interruption of service," Bustamante said.
Time Warner Telecom also has expressed reservations about whether Carlyle can complete the relocation of certain Mainland operations to Hawai'i without impacting Time Warner Telecom's ability to serve customers. The defense department, which is one of Verizon Hawaii's biggest customers, said it wants to ensure the deal doesn't compromise public safety and military readiness.
The IBEW Local 1357, which represents 1,300 Verizon employees, is concerned that excess funds in Verizon's pension plan may be diluted into a national plan, said Scot Long, business manager for the local bargaining unit.
Under terms of the sale, the pension fund covering union workers in essence will be split with Verizon, retaining a portion to cover retired workers and the rest going to a new fund for Carlyle workers.
Rick Wiley, a Verizon human resources director, said the company will transfer more than sufficient funds to cover the liabilities of current Verizon workers who become Carlyle employees. All excess funds kept in the current union pension plan Verizon will keep will be directed to retiree needs, he said.
Albert Lin, an analyst who covers Verizon Communications for American Technology Research, said Carlyle's interest in Verizon Hawaii likely stems from its combined long-distance/local phone service offerings and geographic location.
"Carlyle has a very international perspective and if you look at what is happening in the Japanese economy and the recovery that they're seeing and the growth in general in Asia, Hawai'i is a fantastic gateway between the East and the West for telecom services," he said. "It makes for a good center for communications so that's why I think the Carlyle Group is interested and views it as a very valuable asset."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
