Posted on: Friday, May 21, 2004
Deal to buy Verizon Hawaii expected from Carlyle Group
By Sean Hao
Advertiser Staff Writer
Verizon Hawaii and Horizon Lines not only provide critical services to the state, but soon may have the same owner — The Carlyle Group Inc.
The well-connected Carlyle Group, based in Washington, D.C., manages an $18 billion global network of companies often in industries, such as telecom, that attract greater government scrutiny.
Carlyle is likely to announce an agreement to buy Verizon Hawaii as early as this week, according to The Wall Street Journal. Verizon spokeswoman Ann Nishida and Carlyle spokesman Chris Ullman both declined to comment yesterday on any potential agreement.
Verizon, one of the state's largest private employers, with about 1,800 workers, had scheduled a meeting yesterday with officials at the state Public Utilities Commission, which would have to approve the deal. The meeting was later canceled. Brooke Kane, administrative director at the commission, said she didn't know the purpose of the meeting.
Carlyle Group bought Horizon Lines LLC last year from CSX Corp. for $300 million. Horizon is the second largest ocean shipping company operating in Hawai'i, behind Matson Navigation Co.
That the Carlyle Group would be interested in both Verizon and Horizon, is no surprise, said Dan Briody, author of "The Iron Triangle," a book on Carlyle.
"Their modus operandi is to use their political clout and influence to invest in heavily government regulated businesses, like defense, healthcare, telecom — you name it," Briody said. "If the government has a hand in setting a policy that affects an industry, Carlyle is there."
That strategy is helped by ties that include some of the most powerful people in the world. Briody said Carlyle's list of former and present employees includes Presidents George W. Bush and George H.W. Bush; former British Prime Minister John Major; and former Secretary of State James Baker III.
"They have been called everything from 'access capitalists' to 'the ex-president's club,' because of the stable of ex-politicos they keep on the payroll," he said.
However, Ullman, the company's spokesman, denied that Carlyle uses its political ties to gain an advantage in its government dealings.
"It's a myth that no one has ever produced any examples of," Ullman said. "Carlyle doesn't do business with the government. We buy companies that in some instances do business with the government."
At companies that employ former top government officials, the so called "revolving door" fosters perceptions that public offices are used for personal gain via the delivery of preferential treatment to certain businesses, said Scott Amey, a senior investigator with the watchdog group the Project on Government Oversight.
"The biggest problem it presents is that the government and its contractors don't have an arm's-length relationship," he said. "It kind of exemplifies everyone's impression that the government doesn't have the taxpayers' interests in mind and is more interested in its contractor ties."
A purchase of Verizon's 715,000 land lines, which analysts and bankers estimate could fetch $1.5 billion, likely is within Carlyle's financial reach. Last year Carlyle completed the biggest leveraged buyout in 14 years, according to Bloomberg News, with its $7 billion purchase of Qwest Communications International Inc.'s yellow pages business. That business now is known as Dex Media Inc.
The recent purchase by Carlyle of Horizon Lines was a positive development, said Brian Taylor, Horizon vice president and general manager.
"From the perspective of Horizon Lines here in Hawai'i, they have been an excellent parent company that has allowed us the freedom to operate and provided the necessary capital to grow the business," he said.
Carlyle's other holdings include Vought Aircraft Industries Inc., United Defense Industries Inc. and lesser-known communications companies. Other notable current or former Carlyle employees are William Kennard, a former Federal Communications Commission chairman, and Frank Carlucci, former defense secretary.
Founded in 1987 the Carlyle Group employs about 500 people. The group specializes in leveraged buyouts, equity investments and equity private placements using money raised from institutions, wealthy families and individuals and other investors. Ullman said the historic average annual rate of return for Carlyle's investments is about 30 percent.
He added that Carlyle's companies have good relationships with their unions. In December, Dex reached a three-year collective bargaining agreement with the Communications Workers of America covering nearly 1,500 workers.
"We rely on management to run these companies," Ullman said. "Our goal is always to leave the company in much better shape than when we bought it."
The labor relations of Carlyle's companies are a hot topic for members of the International Brotherhood of Electrical Workers Local 1357, which represents about 1,300 local Verizon employees, said Allen Yamashita, a senior union representative. Union members were meeting this week on Maui to discuss the investment firm among other things.
"We don't know too much," he said. "That issue is a big subject right now. It's a big issue."
The IBEW has three years left on a five year contract with Verizon. The contract contains a clause obligating any buyer to honor that agreement, Yamashita said.
A sale of Verizon's Hawaii operations isn't expected to have much effect on residential customers because rates are regulated by the PUC.
Like any private equity manager, Carlyle has the ultimate goal of profiting from its investments through a sale, or other transaction, said Richard Aboulafia, vice president for analysis at aerospace and defense industry analyst the Teal Group. "They tend to give a lot of leeway to management to run the company," he said. "They have a good reputation for making money."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
