Verizon buyer Carlyle promises no rate hikes

By Sean Hao
Advertiser Staff Writer

The Carlyle Group Inc. said yesterday it would not raise local telephone rates and would expand service as the new owner of Verizon Hawaii.

DODS

Walter Dods, chairman of First Hawaiian Bank, led a group of local investors who joined Carlyle in the purchase and will have a role in the new company.

The company will be "locally managed and locally operated," said Kennard, adding that there would be "strong local representation" on the board of directors.

Carlyle said new services would be offered, including expanded broadband for high-speed Internet service.

"You can't own a local phone company today and not be competitive in new products and services," Kennard said. "We anticipate that this company will be state-of-the-art."

Carlyle, among the world's largest private equity investors with $18 billion under management, said it expects to increase local employment as operations now done by Verizon on the Mainland such as information technology, management, legal and human resources are brought to Hawai'i. Verizon Hawaii has about 1,700 employees.

"I don't want to say specifically, but it's going to be many jobs," said Kennard. "It's going to be a significant influx."

Dods added, "I'm very excited about it. Jobs will be coming back to Hawai'i. These are good jobs."

The deal, which needs state and federal regulatory approval, is expected to close next year.

For New York-based Verizon, the sale helps pay down some $44 billion in debt while providing money to invest in other Mainland markets. For Carlyle, which typically invests in regulated industries, the Hawai'i operation stands to generate significant cash flow.

Verizon Hawaii reported sales of $610 million and operating income of $58 million last year. Kennard, a former Federal Communications Commission chairman, said splitting off the Hawai'i operation from Verizon should improve profits.

"When you're in effect a subsidiary of Verizon, you're contributing to a lot of national costs," he said. "By carving it out as a stand-alone independent company, many of those costs go away.

"It's a tradeoff, because some costs increase, but we think on average ... we can run the company in a very cost-efficient way."

Carlyle said it would honor Verizon's contract with the International Brotherhood of Electrical Workers Local 1357, which covers about 1,300 employees. There are three years remaining on the five-year contract, which includes a clause obligating any buyer to honor the arrangement.

Scot Long, business manager for Local 1357, said he remains open to working with Carlyle so long as the firm plans no job or benefit cuts.

"We're going to keep our eyes open and give them an opportunity to share their plans with us," he said. "Then again, I'm going to make my position crystal-clear as to what we want as a union."

Long and other employees questioned how Carlyle planned to increase spending in Hawai'i while generating acceptable profits. Carlyle's historic rate of return on investments is about 30 percent annually, the firm said.

"I'm not sure that they're counting on that" rate of return, said Will Power, a research analyst with Robert W. Baird & Co. "Many of the investment funds are investing in more conservative businesses. The local exchange business is still a good cash-flow business."

Still, wire-line phone companies face increasing competition from wireless service providers. Verizon Hawaii has 707,000 local access lines, down from about 735,000 lines at the start of 2003.

The transaction includes Verizon's 707,000 local lines, local print directory and Internet services, but excludes Verizon Wireless.

To compete with wireless carriers and prevent customers from disconnecting, the soon-to-be- renamed Verizon Hawaii will need to offer bundled services, such as local, long-distance and broadband Internet, according to industry analysts. That makes it unlikely Carlyle would try to turn a profit by selling off pieces of the company, said Daryl Schoolar, a telecom services analyst at In-Stat/MDR.

"I would be surprised if they broke it up, because what you want today is to offer multiple services," he said.

For consumers looking for the latest in telecommunications services, separation from Verizon may not be a bad thing, he added. The remaining Hawai'i operation could operate more nimbly than under Verizon's thumb.

"A lot of the most innovative companies in terms of rolling out new services are the smaller ones," Schoolar said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.